Car finance explained

When buying a car you need to decide whether to use savings, or get some form of finance. Using savings is often the cheapest way to purchase a car so it's likely a good decision if you can. However, many of us aren't in a position to buy a car outright, so finance is often a great option.

There are many types of finance so it can feel like a minefield trying to understand the best product as a consumer. Furthermore, the most suitable option differs from person to person depending on your credit history, the value or details of the car you're looking to buy, as well as your personal circumstances or goals.

Motiv considers a range of finance types, to try and help you find the most suitable option when buying your next car. The main products compared by the service are explained below:

Personal Loan

Also known as a unsecured loan or a bank loan.

This type of finance can offer great flexibility as if you are approved the finance company will pay the money straight into your bank account and you can use it for any purpose, including buying from a private seller. However, depending on your circumstances (for example if you have a poor credit history) you may not be eligible to get the best interest rates. Luckily, you can use the Motiv service to see what interest rates you can get in most cases!

The fact that the loan is unsecured means you are not borrowing the money against the value of one of your possessions. So, if your personal circumstances change and you struggle to meet your monthly repayments, the finance company can't repossess your car or home.

Hire Purchase / Conditional Sale

Hire Purchase and Conditional Sale agreements are similar. They are both secured against the car you buy. You will be the registered keeper of the car, however, the finance company will own the car until you make the final payment at which point it's yours. If you don't keep up with the repayments your car can be taken away from you. As the finance company has some security, they are typically able to offer you cheaper interest rates when compared to an unsecured loan, so depending on your circumstances (for example if you have a poor credit history) they can be a good option to consider.

Personal Contract Purchase (PCP)

Like Hire Purchase, with Personal Contract Purchase (PCP) the finance company has security in the form of the car, so if you don't keep up with repayments they can take it away.

With PCP, you only pay down the expected depreciation of the car. In practise this means the finance company will set a guaranteed minimum future value (GMFV) for the car which will depend on many factors including the car, your expected annual mileage and length of the finance agreement. At the end of the agreement, you then typically have three options:

  1. Pay the GMFV (often called a final payment or a balloon payment) and take ownership of the car
  2. Hand the car back to the finance company
  3. If the car is worth more than the GMFV then you might be able to trade it in and use the difference towards your deposit on a new vehicle

This product has grown in popularity as it means monthly payments can be substantially lower making a newer or more expensive car more affordable. However, you will end up paying more interest compared with a Hire Purchase agreement or Personal Loan of the same interest rate, you won't own a car at the end of the agreement without paying the final payment and you may incur additional fees if you go over the annual mileage that the agreement is based on.

Hire Purchase Balloon

This option is the same as standard Hire Purchase with one key difference – there is a larger balloon payment deferred to the end of the agreement meaning the initial monthly payments are lower.

This may sound like "Personal Contract Purchase", however a key difference is that the final balloon payment is not optional, and the future value of the vehicle is not guaranteed. Hire Purchase Balloon may allow more flexible monthly payments to be agreed for vehicles that are likely to have a particularly strong value retention, for example a classic, prestige or super car.

FAQs

If you're over 18, live in the UK and looking to understand how you could buy a used car with finance, then this service is for you. Whether you know the exact car you're looking to buy, or just have a rough spending budget in mind, Motiv can check for products personalised to you.

Motiv check a wide panel of independent finance providers and various different types of finance including Personal Loans, Hire Purchase, Personal Contract Purchase (PCP) & Hire Purchase Balloon. This unbiased comparison combined with the fact that Motiv's lenders offer finance directly to consumers like you, mean there is a chance you will save money compared with dealer finance. Also - given the wide lender panel, Motiv may be able to find suitable products for more consumers than a dealer could.

Yes. All the personal information you supply us with is stored in Motiv's secure data centre in the UK. Motiv need to share this data with carefully selected third parties in order to provide our service, but when doing so this always do so in an encrypted fashion. More information regarding how your personal information is handled is included in the privacy policy.

Annual percentage rate, or APR, is a measure of how much interest the lender is charging you for your loan. It's the yearly cost of borrowing money, factoring in any fees and is typically used to allow finance options to be compared more fairly.

When Motiv display an APR and monthly payment, it will often be identified as a "Guaranteed Rate". This means that this is the actual rate you'll get if you are accepted for that deal. This may sound obvious but it's often not the case. Sometimes a product may be advertised with a "Representative APR" and in these cases the rate you end up with (should you apply) may be higher than the one advertised. Motiv make it very clear whether a rate is guaranteed or otherwise.

A soft search (also known as a quotation search) doesn't leave a mark on your credit file that is visible to lenders, so doesn't affect your credit score. Motiv only use soft searches, so you're in safe hands. If you decide to actually apply for credit then you'll have a hard search done, but this will be done by the lender after you've decided you want to proceed with an application with them.

When you use this service, as part of a product offer you may see your personalised chance of getting accepted for it, should you choose to apply. This is called "Acceptance" in Motiv's service. This can range from 100% (you'll definitely get accepted) down to 0% (you'll definitely get declined). This is now common on many price comparison sites. Motiv should know a thing or two about this – the team invented the concept of 'Chance of Acceptance' in a previous business!

On your results page if there is more than one option presented you will have the option to sort the results in various different ways. By default Motiv try to show you the cheapest options that you have a good chance of being approved for.

No, you will not be changed charged a fee, however Motiv may receive commission from the lenders you are introduced to if you proceed to take out finance with them.

Car finance comes in many forms, but put simply – it's any finance that allows you to buy a car. The main types of finance used when buying a car are Personal Loans, Hire Purchase, Personal Contract Purchase (PCP) and Hire Purchase Balloon.

An unregulated agreement is a credit agreement under which the borrower does not enjoy some of the protections offered by UK Law (specifically the Consumer Credit Act). Most product options that Motiv present are regulated, however in some specific cases (for example if you are looking to borrow a very large amount or looking to fund a prestige vehicle), Motiv may introduce you to a specialist broker who may talk to you about unregulated products.

These agreements can provide benefits in terms of flexibility on terms that certain borrowers find attractive, however Motiv suggest all buyers make sure they understand the offer fully before signing.

Please see our car finance explained guide which explains the different offer types.

On top of the interest that is charged on the finance, there can be fees charged by the lender. These will always be displayed as part of the product advert and will be included within the APR. The types of fees you might see include "borrowing fees", "up-front fees" or "documentation fees" and "option-to-purchase" fees. "Borrowing fees" are typically added to your loan so you pay them back over the term of the loan. "Up-front fees" or "documentation fees" are charged as one-off fees at the start of the loan and "option-to-purchase" fees are charged at the end of the loan (often automatically as part of the final payment).

Regardless of whether you buy the car using a Personal Loan, Hire Purchase, Personal Contract Purchase (PCP) or Hire Purchase Balloon product, you will always be responsible for insuring, taxing and maintaining the vehicle (including MOTs where applicable).

That will depend on the type of finance. If you buy a car from a reputable car dealership then any finance can usually be used. However, if you're buying off a private seller you may be more restricted with Personal Loans offering the most flexibility.

If you are looking to buy your next car from a car dealership (as opposed to a private seller) then often you will be able to trade-in your current car. Only the dealership can provide you with the actual trade-in value they are prepared to offer and this can be affected by many factors including the car's mileage, condition (interior and exterior) and MOT & service history.

If the car has a fault you may be entitled to a refund. If you use a Personal Loan to make the purchase you should contact the seller immediately. If this is done within 30 days and there is a genuine fault you will typically be entitled to a refund. Beyond 30 days getting a refund becomes more difficult. If you finance the car with a Hire Purchase, Personal Contract Purchase (PCP) or Hire Purchase Balloon agreement, the finance company should be you first port of call. However, there is no harm in also contacting the dealership who may be willing to help.

For regulated agreements under £25,000, you can usually cancel within 14 days of the agreement being signed. This period is often called a "cooling off period" and the lender will provide you with details of the specific process you would need to follow in order to do this. If the loan is for £25,000 or greater Motiv recommend you speak with the lender directly regarding your rights.

If the finance cancellation request is accepted, then it will need to be repaid in full. For Hire Purchase, Personal Contract Purchase (PCP) or Hire Purchase Balloon agreements, this will involve the lender reversing the payment with the car dealership and arranging for the car to be returned to them, whilst for a Personal Loan, unless you are yet to make the car purchase it will be down to you to agree a refund with the dealer directly. In either case, you should not assume the dealership will automatically be willing to take the car back. In particular, if you bought the car on the premises of a car dealership and signed a vehicle order form at the location, you may be legally required to pay for the vehicle in full which will require you to have funds available or alternative finance agreed.

Also, if you paid an initial cash deposit, this may not be refundable – even if they do take the car back.

Beyond 14 days, your options to cancel the agreement are likely to be more restricted. If you have a regulated agreement that is a Hire Purchase, Personal Contract Purchase (PCP) or Hire Purchase Balloon agreement you may be able to "voluntarily terminate" – a right that is offered to consumers under UK Law once you have paid more than 50% of the total amount payable (which should be noted in your credit agreement).

For unregulated agreements, this option may not exist and will depend on the terms you sign up to.

All regulated credit agreements allow for early settlement. If you wish to do this you should contact the lender (ideally in writing) and ask them to tell you the total amount you must pay to clear the loan in full. This is amount is called an “early settlement figure” and once you have this to hand you'll have 28 days from when they received your request to pay the amount off in full. Note that when calculating the early settlement figure, the lender is required to include a rebate for a portion of the interest charges that is yet to be incurred (the exact portion depending on how close to the end of the agreement you are).

Note that unregulated credit agreements may not offer the same flexibility for early settlement, so Motiv suggest you understand this before signing up to such an agreement.

Whether you're eligible for car finance depends on the car you're looking to buy, your credit history and your financial position. There's lots of things to consider. Luckily, Motiv have developed a way of you checking what products you're eligible for in just a few minutes.

Motiv work with a range of lending partners. So even if you have a poor credit history, there may be options available.

Motiv work with a range of lending partners. So even if you have limited credit history, there may be options available.

Motiv work with a range of lending partners. So even if you have recently moved to the UK, there may be options available.