What is motor finance?

Motor finance is a credit agreement between you and a lender that lets you buy a vehicle and pay for it over time.

What will a lender need from me?

Lenders usually ask for some basic personal details, proof of income to show you can afford the monthly payments, and valid ID. They will also normally run a credit check.

APR stands for annual percentage rate. It shows the cost of borrowing over a year, including interest and some fees, so you can compare one finance offer with another. You pay the interest on top of the amount you borrow.

Can I buy a second-hand car with motor finance?

Yes. Many people use finance for newer vehicles, but finance is also available on used cars, subject to the lender's own criteria.

Money and renewals

Motor finance

How motor finance works: hire purchase, personal contract purchase, personal loans and guarantor loans explained, plus what APR means for you.

You may want a newer vehicle but not have the money to pay for it in one go. Motor finance lets you spread the cost in monthly instalments. This page explains the main types of motor finance and the terms you will come across.

What are the different types of motor finance?

When you take out motor finance, you will be asked which type you want. These are the most common.

Hire purchase (HP)

Hire purchase is one of the most common forms of motor finance. You are effectively hiring the vehicle from the lender until it is paid off in full. The loan is secured against the vehicle, and you do not own it until the final payment has been made.

The size of the deposit you put down affects how much you pay each month.

Personal contract purchase (PCP)

PCP is similar to hire purchase in that you make fixed monthly payments. The main difference is what happens at the end of the agreement. You can usually:

Hand the car back.
Use any equity as a deposit for your next vehicle.
Pay the final lump sum, known as the balloon payment, and own the car.

If you go over the agreed annual mileage, or the car has damage beyond fair wear and tear, the lender may charge you.

Personal loans

A personal loan lets you borrow a sum of money and pay it back over a set time. If you use it to buy a vehicle, you own the vehicle from the moment the seller is paid. Unlike HP and PCP, the loan is not secured against the vehicle, so you are free to sell it whenever you like.

With a poor credit history, you are less likely to be accepted for a personal loan.

Guarantor loans

A guarantor loan involves a third party, usually a family member or friend, who agrees to make the repayments if you cannot. These are often offered to people with a poor credit history. Lenders frequently ask for the guarantor to be a homeowner. Being a guarantor is a serious commitment, so both people need to understand the risks.

Things to check before you sign

The total amount payable, not just the monthly payment.
The APR and any fees.
Mileage limits and condition rules on PCP deals.
That the lender or broker is authorised by the FCA.

Where to get help

Kompare doesn't arrange motor finance. MoneyHelper is the free government-backed service, with impartial guidance on car finance and borrowing.

Once you have your vehicle, you will need to insure it. See our van insurance and motorbike insurance pages, or read about how we work.