What is used car finance?
Used car finance is a catch-all term for the different ways you can borrow money to buy a second-hand car.
Options include personal contract purchase (PCP), hire purchase (HP) or a personal car loan. Depending on the type of car finance you choose, you could either own the car at the end of your agreement or hand it back.
How does used car financing work?
1. Decide how you want to pay
Work out a budget and the amount of time you need to pay for the car. Compare the various car finance options, including any conditions or fees that might be charged, and pick the one that best suits your circumstances.
Our car finance calculator helps you work out how much a car loan might cost you.
2. Apply for car finance
When you apply for car finance, the lender will carry out a credit check. This will help it decide whether you’re a responsible borrower and how likely you are to pay it back.
3. Put down a deposit and pay the monthly instalments
If your application is approved, you’ll usually pay an initial deposit. This is typically 10% of the car’s price.
You’ll then borrow the remaining balance from the finance provider and repay it in fixed monthly instalments (with interest) over the length of the contract.
A car finance deal normally lasts between one and five years.
4. Your contract ends
At the end of the contract, you’ll either own the car, hand it back to the dealership or take out a new car finance deal (depending on the type of car finance you originally chose).
Is PCP used car finance available?
PCP (personal contract purchase) is a popular way to finance a used car, although unpredictable vehicle prices mean not all second-hand cars are eligible for this type of deal. And you won’t be able to choose a PCP plan if you buy your car from a private seller.
With used car PCP finance, you put down a deposit – typically around 10%. You can use an online PCP finance calculator to find out how much you could borrow.
You then pay regular monthly instalments that effectively cover the car’s depreciation (how much it loses value over time).
At the end of the PCP agreement, you have a choice of:
Paying a final ‘balloon’ payment and keeping the car
Trading in the car and starting a new PCP deal on a new vehicle
Returning the car with nothing more to pay.
There are a couple of things to watch out for, though. You’ll be charged if you exceed your agreed mileage limit. And your vehicle may be repossessed if you don’t keep up your repayments because the finance agreement is secured against the car.
Other financing options for second-hand cars
As well as PCP, there are other ways to get finance on a second-hand car. These include:
Hire purchase
With HP (hire purchase), you usually pay an initial deposit, then make fixed monthly instalments for an agreed period. The loan is secured against the car but you’ll own the vehicle once you’ve made the final payment and paid any ‘option to purchase’ fees.
Monthly payments can be a lot higher than those for PCP, but there won’t be an annual mileage limit or large final ‘balloon’ payment.
If you’re unsure whether PCP or HP is the right used car finance option for you, our guide to PCP vs HP breaks down the differences in more detail.
Personal loan
If you choose to buy a car with a personal loan, you borrow money from a bank or building society rather than a car finance provider.
You won’t need to put down a deposit, and you’ll be the legal owner of the car as soon as you buy it. It means no restrictions on your mileage and, if you want, you could sell the car before you’ve paid back the full loan amount.
Unlike PCP and HP, a personal loan isn’t secured against the car. But you’ll usually need a good credit score to get the best interest rates.
0% credit card
A 0% purchase credit card lets you spread the cost of buying a used car across several months or years. You won’t pay any interest, as long as you make the minimum monthly repayments and pay off what you owe before the end of the agreed 0% period.
If you have any balance left on the card at the end of the interest-free period, you’re likely to be hit with high interest charges
You’ll need to check that your credit limit is high enough to cover the cost of buying a second-hand car. Also, be aware that not all car dealers accept credit cards, so ask before you set your heart on a particular vehicle.
What’s the best way to finance a used car?
The right used car financing option for you will depend on your financial circumstances. This includes how much you can comfortably afford to borrow and over what period of time, plus the size of any deposit you have.
Consider the terms and conditions of a finance deal to make sure they suit you, such as mileage limits and whether you want to keep the car at the end of the agreement.
How to finance a used car with bad credit
If you have a low credit score, your choice of bad credit car finance deals could be limited and you’re likely to be charged a high rate of interest.
You may have a better chance of being accepted for hire purchase or PCP used car finance than a personal loan. That’s because the finance is secured against the car. But you’ll probably have to put down a deposit, unless you can secure a no-deposit car finance deal.
As always, you need to be confident you can comfortably make your monthly repayments to avoid penalty fees.
How to find the best second-hand car finance deals
If you’re applying for used car financing, these tips could help you to get the best deal:
Set a clear budget – get an idea of how much you could afford to spend on a car using our car finance calculator. Remember to factor in running costs too, including car insurance, petrol and road tax.
Check your credit report – get any errors corrected and make sure the registered address is your current one. Register on the electoral roll to help build your credit score.
Save for a larger deposit – most used car PCP finance and HP deals will require a deposit. The larger this is, the less you’ll need to borrow.
Decide how long to borrow for – think about how long you want the loan or finance agreement to last. The longer the term, the lower your monthly repayments will typically be, but you’ll pay more interest overall.
Note the APR – check how the annual cost of borrowing compares between different car finance options, including personal loans. Bear in mind the different terms and fees for each option.
Compare different deals – we can help you compare car financing options without impacting your credit score.
About Car Finance 247 Limited (Car Finance 247)
Car Finance 247 Limited (Car Finance 247) is one of the UK’s leading car finance brokers uniting buyers, car dealers and finance providers. Car Finance 247 acts as a credit broker, not a lender, which means it will show you and distribute products offered by lenders. Advice is provided by Car Finance 247, who are authorised and regulated by the Financial Conduct Authority (653019).
Car Finance 247 is not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner Car Finance 247 earns. All applications are subject to lending and eligibility criteria.
Car Finance 247 will not charge you a broker fee should you decide to proceed with a car finance product.
Car Finance 247 is a credit broker, not a lender, and will show you products offered by lenders. To apply you must be a UK resident aged 18 or over. Credit is subject to status and eligibility.
FAQs
What are used car finance rates?
Car finance providers typically offer rates from around 9.9% APR on used cars (as of May 2024), but you’ll need an excellent credit score to get the lowest interest rates. Those with poor credit scores might be charged 25% or even up to 50% APR with some lenders.
APR represents the total annual cost of borrowing, and is a useful way to compare car finance deals. But the actual rate you’re offered will depend on your financial circumstances and credit score.
Is financing a used car a bad idea?
Using financing to buy a second-hand car does have its downsides. For starters, you’ll pay more for the car overall than if you bought it outright because you’ll pay interest on the loan.
And with some car finance options you risk losing the vehicle if you fail to keep up your repayments.
But if you can’t afford the upfront cost of a car, then using a financing deal could be the answer. In fact, there are plenty of used cars in great nick that won’t lose their value as much as a new car would.
Can I get 0% financing on a used car?
It’s more common to find 0% car finance deals for new cars. But it is possible to find them for used cars too, particularly at major dealerships.
If you’re offered a 0% finance deal, weigh up whether it’s really as good as it seems. Watch out for inflated car prices or hidden charges that may mean you actually end up paying more than you would on a standard car finance deal.
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.
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