Car Finance Explained
Helping you find a practical route to owning a car is what we do at Hippo Finance. Whether it’s to spread the cost of purchase, get access to a better vehicle or have more flexibility in ownership options, car finance is the solution for millions of people in the UK every year. Our job is to make it affordable and accessible for you - so you can get a car you love on a deal that works.
Representative example: Borrowing £7,500 over 60 months with a representative APR of 13.9%, flat rate of 7.25% and deposit of £0.00, the amount payable is £170.98 per month, with a total cost of £2758.68 and a total amount payable of £10,258.80. We are a credit broker, not a lender.
Everything you need to know about car finance
How does car finance work?
“Car finance” is an umbrella term for the different methods of borrowing money to purchase a car. When you finance a car, you’re taking out a loan to cover the cost of the vehicle, which you’ll then pay back over a set period of time (usually two to four years) via monthly repayments. How these payments are structured - and their cost - comes down to the type of car finance you choose, how much you borrow and the length of the agreement.
Who is car finance for?
Essentially, car finance is for anyone who wants to make the financial aspects of owning a car more manageable. Why? Because it costs a lot to buy a car outright – too much for many people to afford in one go. Millions of people in the UK take out car finance each year. Over 90% of new cars are financed, and plenty of used car buyers take the finance route, too. Car finance might work for you if:
- You need a vehicle but don’t have the money to buy one: purchasing a car in full tends to require a significant amount of cash. Car finance breaks this cost down into manageable chunks.
- You’d rather spread the cost of buying: even if you have the cash to buy outright, you may prefer to spread the cost for the sake of your budget or having cash spare for other areas of life.
- You want to get a better vehicle: breaking down the cost of purchase to an affordable monthly rate opens up the opportunity to get a better vehicle than you could afford to buy outright.
- You want to improve your credit: as long as you pay on time and in full, sticking to a finance agreement can build your credit score.
How to apply for car finance?
If you’re new to the idea of car finance, applying might seem a bit daunting. The good news is it doesn’t need to be.
Applying for finance with Hippo starts with our free, quick and simple soft credit check. This is a two-minute application that lets you know if you’re likely to be approved for finance with one or more of the lenders we work with. It won’t affect your credit score to check,* and there’s no obligation to go any further once you know where you stand.
What are the different types of car finance?
However you want to finance your car purchase, we can help. We offer a few different types of car finance, including:
- Personal contract purchase (PCP)
- Hire purchase (HP)
- Conditional sale (CS)
- Personal loan
What is personal contract purchase (PCP)?
What is PCP?
PCP is a flexible type of car finance that allows you to keep your options open at the end of the deal. A typical PCP deal consists of three parts:
- Upfront deposit: an adjustable initial payment you can make to reduce the amount you borrow.
- Monthly payments: fixed monthly payments that you’ll make for the duration of the contract.
- Final balloon payment: an optional one-off payment that transfers ownership of the vehicle to you.
At the end of the deal, you have several options:
- You can buy the car by making the optional balloon payment.
- If you want to make the balloon payment but can’t afford to, you can refinance it to spread the cost.
- You can return the car and start a new finance deal. If your vehicle is worth more than the amount left to pay on the deal, you can use the difference as part exchange value against your new deal.
- You can return the car and walk away, with no further obligation.
It’s this end-of-term flexibility that makes PCP the most popular form of car finance in the UK.
Benefits of PCP
- Offers the most flexibility of any finance method, giving you the option to own the car or give it back at the end of your contract.
- Monthly payments are usually lower than finance methods like hire purchase and conditional sale, as the cost of the agreement is spread between monthly payments and the optional balloon payment (which can shoulder up to 50% of the total cost).
- End-of-term flexibility means you can easily switch to a new car every few years.
- Lower monthly payments mean you might be able to get a better vehicle on your budget.
- You’ll build towards positive equity in the deal as you pay it off, with the potential to have part exchange value at the end of the deal if you want to return the car.
Disadvantages of PCP
- If you want to take ownership of the vehicle at the end of the deal, the balloon payment is usually a substantial chunk of the deal that you’ll need to pay off in one or refinance.
- You’ll face charges if you return the vehicle in poor condition or with excess mileage to the figure stated in your agreement.
- If you don’t need the end-of-term flexibility, other finance options may work out cheaper.
- If you have negative equity in your vehicle at the end of the deal, you’ll need to pay the difference before returning it.
What is hire purchase (HP)?
What is hire purchase?
Hire purchase is similar to PCP but is structured towards ownership from the start. Payments are broken down into:
- Upfront deposit: as with PCP, this is adjustable.
- Monthly payments: your monthly payments are fixed, but they cover the entire cost of the deal rather than part of it.
- Option to purchase (OTP) fee: this is a small final payment that you make to transfer ownership of the vehicle to you.
End-of-term options aren’t as open-ended as PCP. You will take ownership of the car once you’ve made the final monthly payment and OTP fee.
Benefits of hire purchase
- Spread the cost of ownership over fixed monthly payments.
- The entire cost of the deal is spread evenly across your monthly payments, so you have the same fixed cost until the end of the deal, with ownership guaranteed once you’ve made the final payment.
- There’s no big final balloon payment to own the car – just a small OTP fee.
- Mileage and condition restrictions are less strict than a PCP deal.
Disadvantages of hire purchase
- Monthly payments tend to be higher than PCP because the full cost of the deal is included in them.
- There’s little end-of-term flexibility, meaning you’re fully committed to the entire cost of the agreement.
- You won’t own the car until the end of the deal.
- Immediate ownership – the car is yours from day one with no usage restrictions.
- You can buy from any seller you like, including dealerships, private sellers and auctions, which is especially useful if the vehicle you want comes from a seller who can’t offer PCP or HP finance.
- No lump sum payments are required at either end of the deal – just fixed monthly repayments until you’ve paid off the total amount.
What is conditional sale (CS)?
What is conditional sale?
Sometimes referred to as a lease-to-purchase agreement, conditional sale works in the exact same way as hire purchase, except there’s no option to purchase fee or administrative requirements required to transfer ownership of the car. Instead, the car will become yours as soon as you make the final monthly payment.
What is a personal loan?
What is a personal car loan?
A personal loan is an unsecured loan that allows you to borrow the full cash amount required to buy the vehicle upfront. The loan isn’t secured against the vehicle as it is with PCP or hire purchase. Instead, it allows you to take ownership of the vehicle straight away, which means it’s yours to operate as you please.
Benefits of a personal car loan
- Immediate ownership – the car is yours from day one with no usage restrictions.
- You can buy from any seller you like, including dealerships, private sellers and auctions, which is especially useful if the vehicle you want comes from a seller who doesn’t offer PCP or HP finance.
- No lump sum payments are required at either end of the deal – just fixed monthly repayments until you’ve paid off the total amount.
Disadvantages of a personal car loan
- You’ll typically need a better credit score to get an unsecured loan and access good rates, compared to other finance options.
- Monthly costs will be higher than some alternatives because the full cost of the loan is spread evenly across the monthly repayments.
- Some lenders we work with don’t offer personal loans.
Can I get car finance with bad credit?
Worried about finding a deal with bad credit? We can help with:
- Bad credit car finance
- Refinancing your car
- Negative equity car finance
- Guarantor car finance
- Self-employed car finance
- Car finance on benefits
As bad credit and no deposit specialists, we also work with customers who’ve previously been refused car finance.
We’re proud to work with those others won’t, so whatever your worries, don’t ever hesitate to get in touch with us and see what we can do for you.
Why go for car finance with Hippo?
- Bad credit and zero deposit specialists
We pride ourselves on helping people find a car finance deal that works for them. We work with a handpicked panel of lenders to offer a range of affordable, accessible finance products for those who’ve faced financial struggles in the past.
- Fast and free soft credit checks
You can find out exactly where you stand today with our free soft credit check. Applying takes two minutes, won’t affect your credit score* and we’ll typically be able to let you know in under 30 minutes** if you’ve been pre-approved for credit with one or more of our lenders.
- Used Car Promise
Looking for used car finance you can trust? Every second-hand vehicle in the Hippo range comes backed by our Used Car Promise, which includes a 130-point quality inspection, 3-month warranty, 14-day money-back guarantee and minimum 6-month MOT as standard.
- Drive away today
Go for same-day collection on thousands of in-stock vehicles. Don’t fancy making the trip? Stay at home and go for fast nationwide delivery instead.
- Dedicated account support