Car finance is the most common way to buy a new car in the UK, but it's also widely used for used cars. Used correctly, it can make a decent car accessible. Used badly, it's an expensive way to drive something you don't own. Here's what you actually need to understand.
HP (Hire Purchase) — The Straightforward One
HP is simple: you put down a deposit, pay fixed monthly instalments over an agreed term (usually 2–5 years), and at the end of the term, you own the car. That's it.
Example: £10,000 car, £2,000 deposit, 48 months at £220/month = £10,560 in repayments + deposit = £12,560 total cost. The difference between £10,560 and £8,000 borrowed is your interest.
Who HP suits: People who want to own the car outright at the end, who drive high mileage, or who want a straightforward arrangement without worrying about balloon payments.
PCP (Personal Contract Purchase) — The Flexible One
PCP is more complex. You pay a deposit, then lower monthly payments than HP over the term — because you're not paying off the full value of the car. At the end, you have three choices:
- Pay the "balloon" (GMFV) — a large final payment that was set at the start, and you own the car
- Hand the car back — walk away with nothing owed (if within mileage limits)
- Part-exchange into a new PCP — use any equity as deposit on the next car
Who PCP suits: People who want lower monthly payments, who like changing cars every 3 years, and who don't necessarily want to own the car outright.
Which Is Actually Cheaper?
HP typically costs less in total interest than PCP for used cars, because you're paying off the full value rather than deferring a large chunk to the end. PCP's lower monthly payments look attractive but the balloon payment at the end means you've paid more overall if you want to own the car.
The exception: if you hand the car back at the end of PCP, you've paid for use of the car rather than ownership — similar to a lease. Whether that's value depends on what you'd have paid otherwise.
Key Things to Check Before Signing
- APR (Annual Percentage Rate) — the total cost of borrowing. Compare this across lenders, not just monthly payments. A lower monthly payment can mean a longer term and more interest overall.
- Mileage limits on PCP — exceed them and you pay a per-mile penalty at the end. Set the limit based on how you actually drive, not optimistically.
- Early settlement figures — what does it cost to pay off early? HP is usually more flexible here.
- Section 75 protection — if you pay a deposit on a credit card and finance the rest, you have additional consumer protection on the deposit portion.
Should You Finance a Used Car at All?
Finance makes sense if: the interest rate is low (under 8% APR is reasonable; under 5% is good), you can comfortably afford the monthly payments, and the car is reliable enough to last the finance term.
Finance doesn't make sense if: you'd be borrowing to buy a car you can't really afford, the APR is high (some dealer finance runs at 15–20%+ APR), or the car is old enough that it might not outlast the finance agreement.
Always compare dealer finance with a personal loan from your bank — personal loans are often cheaper for good-credit borrowers.
Browse cars with finance available from AllCarsUK dealers — London, Manchester, Birmingham, and across the UK.