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Car finance is a catch-all term for the different ways you can borrow money to pay for a new or second-hand vehicle.
Car finance options include personal contract purchase (PCP), hire purchase (HP), a personal car loan and leasing – you can find out more about each option below.
You usually pay a deposit to the finance company, then make monthly repayments plus interest. Once you’ve made the last repayment and paid a small ‘option to purchase’ fee, the car is yours to keep.
The fee is usually between £100 and £200, but it varies by lender and should be shown in your finance agreement.
Learn more about HP
Normally you’ll pay a deposit, followed by monthly repayments based on the car’s depreciation (the amount of value it will lose during the loan term). At the end of the contract, you return the car or make a final ‘balloon’ payment to buy it outright.
Learn more about PCP
Borrow the money to buy a car outright and own it straight away. You’ll then repay the loan in monthly repayments, plus interest, over a fixed period.
Learn more about car loans
Provided your credit limit is high enough, you could use a 0% purchase card to buy a car. But you’ll need to make at least the minimum repayment each month.
Pay off the balance in full before the end of the 0% period and you could spread the cost without paying any interest. You’ll usually need a good credit score to get a 0% purchase card.
Learn more about purchase cards
Also known as car leasing, you pay a monthly fee to rent the car for two to five years, then return it at the end of the agreement period.
You can’t currently compare PCH options through Compare the Market.
If you’re looking for cheap car finance, there are a few things to think about. For example, how much can you afford to borrow and how long do you want to spend paying it back? And do you want to keep the car at the end of the agreement?
Here’s how the different types of car finance compare:
Hire purchase (HP) | Personal contract purchase (PCP) | Personal Loan | |
|---|---|---|---|
Deposit needed? | Usually, but no-deposit HP is available | Usually, but no-deposit PCP is available | No |
Mileage restrictions? | No | Yes | No |
Own the car straightaway? | No | No | Yes |
Own the car at the end of the contract? | Yes | No, unless you make a final balloon payment | Yes |
Secured against the car? | Yes | Yes | No |
As a rule, you apply, get approved and pay a deposit, then make monthly repayments until the contract ends (although different types of car finance vary slightly).
Read more on how car finance works.
Work out your budget, then decide how long you need to pay back what you borrow.
If your car finance application is successful, you’ll usually need to pay a deposit. You’ll then make monthly repayments (with interest) over a fixed period.
Depending on your choice of car finance, when your contract ends you can:
• Pay a balloon payment or ‘option to purchase’ fee to buy the car outright
• Hand the car back to the dealership
• Start a new car finance deal.
Simply put, the more you borrow, the more you’ll pay back.
The higher the APR, the more you’ll pay in interest. To get a loan at the lowest APR, you’ll need a healthy credit history.
The monthly payments for a PCP agreement are likely to be cheaper than an HP deal, for example. But you’ll have to pay a considerable balloon payment at the end of a PCP deal if you want to own the car.
The longer the loan term, the more you’ll pay in interest. To lower the total cost of your car finance, aim to pay off your loan in the shortest time you can afford.
You need a good credit score to get the best car loan rates.
Our car finance calculator can give you an idea of how much your monthly repayments could be and how much interest you might pay overall.
If you’re looking for car finance with bad credit, we can help you compare car loans and finance packages.
You can explore a range of lenders, including those that offer bad credit car finance.
If you make all your repayments on time, car finance could help improve your credit score as you’re showing you can successfully manage a loan agreement.
But be mindful that missed or late payments could damage your credit score and may put your car at risk of being repossessed.
What works best for you will depend on your personal circumstances. If you have the money in the bank, you could avoid paying interest by buying a car outright. Plus, you’ll have full say over when you choose to sell it.
However, buying a car outright can drastically reduce your savings in one go. If you can find an affordable finance deal or car loan, it could help you to spread the cost instead. And if you manage the car finance responsibly, it could help you build your credit score.
The documents required to apply for car finance vary from lender to lender. But you’ll usually have to provide:
Proof of address – a recent bill, for example
A photo or scan of your driving licence
Proof of income – payslips or bank statements, for example
Your contact details.
Compare your options and understand what to consider before choosing a deal
It usually takes between one to two days to get car finance approval in the UK.
You could get a decision in principle within the same working day.
No, you don’t need to know what car you want to buy before applying.
You can run a search without knowing the registration and we’ll help you find out the potential cost of financing based on the other details you share.
No, there are no fees or costs when you compare car finance and car loan options through Compare the Market. Instead, we receive a fee or commission from the lender for arranging your car finance.
In some cases, car dealers or lenders may charge an administration fee. If this is the case, we will show this to you.
If you’re struggling to meet your monthly repayments, talk to your finance provider. It may be able to help restructure your payment plan.
If you’re late or miss making a repayment, you could face penalty charges.
If you continue to miss HP or PCP payments, the finance company could take back the car and use the proceeds to repay your debt.
With a personal loan, the lender will expect you to repay whatever you still owe. But you won’t be under any obligation to sell your car.
Whichever car finance option you have, late or missed payments will hurt your credit score and could affect your ability to get finance in the future.
In some cases, you can end your contract early and hand back the car to the finance provider without having to pay a penalty.
If you bought your car on PCP or HP, you can return it if you’ve already paid off 50% of the loan, including any interest and fees. This is called voluntary termination.
If you lease your car, you could return it but you may have to pay an early termination fee. Check the terms of your lease for more details.
A typical car deposit is usually 10% of the car’s value.
As a rule of thumb, the bigger the deposit, the cheaper your car finance will be. This is because you’re borrowing less and could pay less interest on a shorter loan term.
Yes, you can usually repay a car loan early, although you may have to pay an early repayment charge.
To end a PCP or HP agreement, contact your finance provider and ask for an early settlement figure. This is the total amount needed to pay off the agreement early. It includes the final balloon payment on a PCP deal.
When you apply for car finance, the provider will run a hard credit check. This can affect your credit score temporarily.
Simply applying to get a finance quote through Compare the Market doesn't involve a hard search and won’t affect your credit score. A hard credit check will never be carried out without a customer’s prior consent.
Whether or not you need a deposit depends on your lender.
Some lenders don’t ask for a deposit. But if you can afford it, paying a deposit or part-exchanging will reduce the cost of your loan and your monthly repayments.
Typically, you're more likely to be considered for a car loan if:
You're aged between 21 and 70 years old
You're looking to borrow at least £5,000
You have enough address and credit history to be identified by the credit bureau and have no significant negative credit history
You are buying a vehicle from a reputable dealership.
Different lenders will also have their own credit score and affordability requirements, which you’ll need to meet before they agree to offer you a car loan.
When comparing car loans, you could get a decision in minutes.
Simply fill out the online application and your eligibility will be assessed in minutes.
Yes, you can get car finance to buy a second-hand car.
Yes, you can use a part-exchange as a deposit towards your next car.
Depending on how much your part-exchange is worth, it could reduce your total loan amount. This could mean you pay less each month.
Yes, you can buy a car from any reputable UK dealership.
Once you’ve found the car you want, just let your chosen lender know and it’ll make the necessary arrangements.
No, it’s illegal to knowingly sell a car with outstanding finance on it.
You can only sell the car once your finance contract comes to an end, or if you settle the outstanding finance first.
You can sell a car you’ve bought with a personal loan because you own the car straight away.
If you bought a car on PCP or hire purchase finance (not lease) between 6 April 2007 and 1 November 2024, you could be due compensation if your lender included a discretionary commission arrangement (DCA), a high rate of commission, or a contractual tie that you weren’t properly informed of.
The FCA (Financial Conduct Authority) has introduced a redress scheme to tackle this, although parts of the scheme are currently suspended following a legal challenge. But it’s still worth submitting your claim sooner rather than later if you think you could be affected. You can find more information on the FCA’s website.
Beyond that, if you think you’ve been mis-sold a car finance deal at another point or for a different reason – for example because the terms of your contract weren’t made clear – you can contact your car finance provider and lodge a complaint.
If the finance provider rejects your complaint, you can take your case to the Financial Ombudsman.
Charlie is a senior commercial leader with close to a decade of experience across the UK’s leading personal-finance and comparison platforms. Before joining Compare the Market as Head of Commercial in 2024, he held senior commercial roles at TotallyMoney and MoneySuperMarket Group.
1 Based on the % of respondents claiming they have used Compare the Market in the last 12 months vs. other leading PCWs. Source: Savanta BrandVue Financial Services, National Representative Survey of 12,257 respondents (June 2026)
What our expert says...
“Not many of us have enough savings put aside to pay for a car in one go, which is why buying a car on finance is a popular option. But it’s important to work out the total cost of your new set of wheels. Choosing a longer term usually means lower repayments, but you’ll pay more in interest overall.”