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What are the different types of loan and which one do I need for car finance?

Loans come in all different shapes and sizes, with individual types of loans serving distinct purposes. The way each one works is slightly different, however much like a car the one you’ll need will depend on your circumstances.

Here are the main types of loans explained:

Secured loans

A secured loan is a debt that’s attached to something you own. It acts as security. If you don’t keep up with the repayments on the loan, the item can be taken back from you to recover the debt.

The most well-known type of secured debt is a mortgage. You take the loan out on the property and the equity (the value of the house that you’ve paid off and own), acts as security. 

Fail to keep up with the monthly repayments, and the mortgage provider can repossess the property.

When it comes to car finance, a secured loan works the same, except this time the car acts as the security. 

The advantage of a secured loan is that lenders tend to offer more money, longer repayment periods and better rates of interest because they have the security of knowing they can reclaim the value of the loan if you can’t pay. 

Unsecured loans

An unsecured loan is a debt that’s not secured against anything. 

As you don’t need to put up any assets of yours for security on the loan, the amount you can borrow and the interest rate you’ll be charged is usually determined by looking at your credit report. 

READ: Top 5 tips to boost your credit score

This will give lenders an idea of how you’ve dealt with credit in the past and what kind of risk you pose as a borrower.

With these types of loans, generally, you won’t be able to borrow as much as you would with a secured loan. The terms can also be shorter and the interest rate higher.

Personal loans

This is one type of unsecured loan, usually taken through a bank or building society. 

With this kind of loan, you’re given the money outright to use how you wish and pay it back over an agreed period of time, usually with interest. 

As with all unsecured loans, your credit report and score is a determining factor in how much you can borrow, how long you can borrow it for, and how much interest you’ll be charged. 

Peer-to-peer loans

Also called ‘social lending’, a peer-to-peer loan works by matching you up with an individual (usually through a peer-to-peer website) that’s willing to lend you the money and agree terms with you, rather than going through a formal financial institution.

A peer-to-peer loan often offers lower interest rates than you’d find with a traditional loan. However, in order to get the most competitive rate, you have to have a very good credit rating. 

Credit cards

Not classed so much as a traditional loan, a credit card is often seen as a loan alternative. 

With this credit facility, a credit card is issued at an agreed rate of interest with a set spending limit (although that can either be increased or decreased over time). 

You’ll only ever be charged interest on the amount you use. Some credit cards come with promotional offers of 0% interest for a limited time, and others will allow you to transfer a balance from another account.

Usually, with smaller limits than secured or unsecured loans, credit cards are often used as a way to top up existing cash flow, put down a deposit, or fund a smaller project.

What about the different types of car finance loans?

There are many different ways to finance your new car, although most car loans are secured rather than unsecured. 

The loans we’ve spoken of so far are usually alternative ways to fund a vehicle.

Car finance loans differ, as they meet the specific need of financing a vehicle. 

At Hippo Motor Finance, you can have the convenience of doing it all – choosing your new car and finding the right finance – in one place. 

As well as being a convenient solution, we also have relationships with many different lenders so we can find the right type of finance for you, whatever your circumstances.

Hire Purchase (HP)

Hire Purchase is a type of secured car finance loan. You can put down a deposit at the start if you wish, then pay the fixed balance and interest in monthly instalments over a set period of time. 

The term of the loan varies depending on your circumstances and deposit amount, but it can be anywhere between one and five years. 

READ: What is Hire Purchase and how does it work?

As this is a secured loan, until you’ve settled the loan the finance company owns the car. Once all the repayments have been made, you become the legal owner.

Personal Contract Purchase (PCP)

PCP is one of the most common forms of car finance. With PCP, you can choose to pay a deposit followed by a series of monthly instalments to cover the car’s depreciation over the term plus interest. 

As the monthly instalments only cover the vehicle’s depreciation, and you’re not covering the total cost of the vehicle, PCP deals are lower than with Hire Purchase.

READ: What is Personal Contract Purchase and how does it work?

At the end of the contract, you can choose to either pay a lump sum to buy the car outright, part exchange it for a new car, or simply return it. 

Personal Contract Hire (PCH)

With PCH, otherwise known as leasing, you never own the vehicle. Effectively it’s a long-term car rental. So, you make regular payments for using the car and hand it back at the end of the term. 

Servicing and maintenance can also be included in your package, allowing you to drive with confidence, knowing that if anything did happen, you’d be covered. 

READ: Advantages and disadvantages of Personal Contract Hire

Which type of loan do I need for car finance? 

What type of loan you need for car finance is always going to depend on a number of things. 

  • How much is the car you want to buy? 
  • Do you want to own it or would you like a new car every few years? 
  • Are low repayments your top priority? 

At Hippo Motor Finance, we can help you explore your options, find out what would fit your financial circumstances as well as what you’re looking for from your car finance. 

Use our quick and easy online application tool to find out which car finance would suit you best without affecting your credit score: 

Representative Example of Credit

We expect more than 51% of our customers to achieve this rate.

Loan Amount Total Cost of Credit Representative APR 60 Monthly Payments Deposit Amount Loan Term Total Amount Payable
£7,500 £3831 19.1% APR £188.85 £0 60 Months £11,331

All offers are subject to change at any time, you must be 18 or over and finance is subject to status, vehicle availability and terms and conditions apply. We can introduce you to a limited number of finance companies, a commission may be received. Failure to maintain payments may result in termination of your agreement and the vehicle being returned, this could affect your credit rating and make it more difficult to obtain credit in the future. All prices correct at time of publication.

We purchase a wide variety of vehicles from all over the country to ensure the best quality and value for our customers, all of our cars go through a thorough inspection process and if they do not meet our standards we do not sell them. We endeavour to inform our customers (where possible) the provenance of the vehicle they are buying and as such we will always inform you if the vehicle has previously been either an ex fleet or hire car. Should your vehicle be an ex hire/fleet car please do not be concerned as we would never value this vehicle differently when you come to part exchange it and there is no difference to the CAP valuation either.

You should try and estimate the distance you will travel as accurately as possible to try and avoid excess mileage charges at the end of your contract.

All pictures and/or photos and car descriptions on this site are for illustration and reference purposes only and are not necessarily the vehicle on offer. All offers are subject to change at any time and are subject to finance approval and vehicle availability. All prices correct at time of publication. E & OE.

Hippo Vehicle Solutions t/a Hippo Motor Finance is authorised and regulated by the Financial Conduct Authority. FRN 658076. We are a Credit Broker not a Lender and can introduce you to a limited number of lenders. Subject to status and to UK residents only (excl. the Channel Islands). Individuals must be 18 or over. Guarantees and indemnities may be required. We typically receive a fixed commission calculated by reference to the vehicle model, product or amount you borrow, for introducing you to a lender but this does not affect the interest charged on the agreement, all of which are set by the lender. Images for illustrative purposes only. Hippo Vehicle Solutions t/a Hippo Motor Finance is an Appointed Representative of AutoProtect (MBI) Limited for insurance distribution purposes. AutoProtect (MBI) Limited is authorised and regulated by the Financial Conduct Authority. Its firm reference number is 312143. You can check this at www.fca.org.uk

We endeavour to ensure that all information including the specifications and finance availability are accurate. Whilst we make every effort to display correct information we are aware that errors may occur occasionally. We are not able, therefore, to guarantee the accuracy of all information especially when given to us by third parties. If you do require clarification of some information you have seen on our website, please email us at info@hippomotorgroup.com . This does not affect your statutory rights.

We are a broker not a lender and our registered office is Unit 26 Trident Park, Trident Way, Blackburn, BB13NU.