Car refinance Car finance explained: what it is and how it works

A practical guide to UK car finance choices

Understanding APR is not just percentages - it is what you pay overall.

Why this guide matters now

With living costs still biting and lenders competing, car finance is evolving. UK buyers have more choice, faster online approvals, and sharper differences in cost between products. This guide breaks down the essentials so you can compare PCP, HP, zero deposit deals and more, avoid expensive mistakes, and choose a finance path that suits your budget and driving habits.

Who benefits from this advice

• First-time buyers comparing monthly costs vs ownership
• High-mileage drivers weighing PCP limits vs HP certainty
• Households protecting savings with zero deposit options
• Used car buyers seeking predictable payments
• Anyone refinancing or checking past deals for FCA redress

The right product depends on how you drive, how long you will keep the car, and the total cost after interest and fees.

Key terms without the jargon

• APR: The annual percentage rate that captures interest and most charges. A lower APR usually means a lower total cost.
• Deposit: Upfront payment that reduces how much you borrow. Even 5-10% can trim interest and monthly payments.
• PCP: Personal Contract Purchase. You pay for depreciation with lower monthly payments, then decide at the end to pay a balloon to own, hand back, or part exchange.
• Balloon payment: The optional final amount on PCP, set as Minimum Guaranteed Future Value at the start.
• HP: Hire Purchase. You repay the full car price in fixed instalments. No balloon. You own the car at term end.
• PCH: Personal Contract Hire. A lease. You never own the car and simply return it.
• MGFV: Minimum Guaranteed Future Value used to set PCP’s final payment.
• Mileage allowance: PCP and PCH include limits. Exceed them and you pay per mile.
• Negative equity: Owing more than the car is worth. Can happen if you end early or rolling balances into new deals.
• FCA redress: A 2025 scheme may compensate consumers mis-sold car finance by UK-regulated firms.

Your main routes to the driver’s seat

Below is a quick comparison of popular UK options.

PCP in brief

• Lower monthly payments as you finance depreciation
• Balloon based on MGFV set upfront
• End options: pay to own, return, or trade in
• Watch mileage and condition charges

HP in brief

• Straight repayments of the full car price
• No balloon or mileage rules
• Higher monthly payments but clear ownership
• Suits higher annual mileage and used cars

Zero deposit choices

• No upfront cash needed
• Higher monthly and total interest likely
• Credit profile matters more
• Helpful for preserving savings during tight budgets

What it really costs - with examples

• APR drives total cost. A £10,000 finance over 60 months at 5.5% totals about £11,423. At 20.9%, it is roughly £15,607. Shopping around matters.
• Deposit reduces risk and interest. Even 5-10% can lower the rate and the monthly.
• PCP looks cheaper monthly, but if you pay the balloon to keep the car, the overall cost can exceed HP.
• Mileage penalties on PCP and PCH add up, especially if you under-estimate long commutes.
• Market backdrop: new business volumes rose around 11% year on year in March 2025, increasing lender competition and choice for consumers.

Standout: A small cut in APR can save thousands over five years.

Who is likely to be approved

Eligibility depends on:

• Credit history: Stronger scores often access 5.5% APR territory. Weaker credit can see 14.9% to 20.9%.
• Income and stability: Lenders assess affordability, employment type, and time at address.
• Deposit size: More upfront usually improves terms and approval odds.
• Vehicle age and value: Older cars and long terms may limit available products.
• Existing debts: High utilisation and recent credit behaviour can raise rates or reduce limits.
• Digital checks: Many lenders use instant affordability and soft searches online for tailored quotes.

Tip: Check your credit file, clear small balances, and consider a modest deposit to lower APR before you apply.

From search to keys - the simple steps

1. Set budget and target monthly payment range
2. Check credit score and clean up quick wins
3. Decide PCP, HP, or alternatives by usage
4. Compare APR quotes from multiple lenders
5. Choose deposit level and term length carefully
6. Review fees, mileage and balloon figures
7. Apply online and upload verification documents
8. Sign, collect car, and set up direct debit

Benefits and trade-offs at a glance

• PCP pros: Lower monthly cost, flexible end options, easier to change cars. Cons: Mileage and condition charges, balloon to own, risk of negative equity.
• HP pros: Simple path to ownership, no mileage limits, predictable payments. Cons: Higher monthly cost, less flexibility to exit early.
• Zero deposit pros: Keep savings intact, faster access. Cons: Higher total interest, stricter eligibility.
• PCH pros: Newer cars with maintenance options, simple returns. Cons: No ownership, mileage fees, end charges.

Rule of thumb: If you plan to keep the car long term or drive far, HP often aligns better. If you value flexibility and lower monthly payments, consider PCP.

Watchpoints before you sign

• APR and fees: Compare like for like. A lower APR with a longer term can still cost more overall.
• Mileage accuracy: Set a realistic allowance. Underestimating is costly at return.
• Condition standards: Budget for servicing, tyres and minor repairs to avoid charges.
• Early settlement: Ask for payoff figures and any exit fees.
• Negative equity: Be cautious rolling balances into a new deal too soon.
• FCA redress: If you suspect past mis-selling or unclear commission, check your eligibility for compensation.

If none of these fit perfectly

• Personal loan: Shop bank and building society rates. You own outright and can negotiate cash discounts.
• Delay the purchase: Build a deposit to lower APR and total cost.
• Cheaper car or used model: Reduces borrowing, interest, and insurance.
• Car subscription: Shorter commitments with bundled costs, but usually pricier monthly.

Quick answers to common questions

• Is PCP cheaper than HP? Monthly payments often are, because you finance depreciation. If you pay the balloon to own, the total can exceed HP.
• How important is APR? It is the key cost driver. A few percentage points can save or cost thousands.
• Can I get zero deposit with fair credit? Often yes, but the APR and monthly may be higher. A small deposit can improve terms.
• What happens if I exceed PCP mileage? You will pay a per-mile fee. Confirm the rate and set a realistic allowance upfront.
• Can I settle early? Most agreements allow early settlement. Ask for a settlement figure and check for fees.
• Are online approvals safe? Reputable UK-regulated lenders use secure digital processes with soft searches for initial quotes.
• Could I get compensation for past finance? The FCA’s 2025 redress scheme may help if you were mis-sold. Check eligibility with the lender or a regulated claims route.

Ready to take the next step

• Compare at least three APR quotes for the same term and deposit
• Run the numbers with and without a deposit
• Decide between PCP flexibility or HP ownership
• Check credit, documents, and affordability before applying
• Use digital tools for instant decisions and clear breakdowns

Short line: Lower APR plus a sensible deposit usually wins.

Important information

This guide provides general information for UK consumers and is not personalised advice. Always check the lender’s terms, verify total cost including fees, and consider independent financial advice. Eligibility and rates depend on your circumstances and lender criteria.