Car finance guide

You may need to take out finance to spread the cost of buying a car over a number of years. The options available are a car loan from a bank or lender, or car hire purchase or personal contract purchase from a car dealer.

Whatever option you choose, you need to ensure you’re comfortable with the size of the payments, the rate of interest and the total amount you have to pay back including any charges. 

Car loan

A car loan is an unsecured loan which means a lender can’t take the car from you if you get into difficulty with repayments. It’s a personal loan which is not tied to the car, so you could borrow more or less than its value. If you buy a car with a personal loan, you own it outright.

Lenders set their own lending criteria for personal loans. They look at your credit rating and financial history to decide if they can offer you a loan and the amount you can borrow. Personal loans are usually offered between £1,000 and £50,000 with fixed repayments spread over one to several years.

TSB offer personal loans which you can use to buy a car. You can apply for a TSB loan online, in branch or over the phone on 0345 835 3861. You can use our loan calculator to find out how much it could cost.

Car hire purchase (HP)

Car hire purchase is when you hire a car from a car dealer or garage and pay for it through monthly instalments until the end of the contract. You don‘t own the car until the end of the contract.

When you take out HP, you usually put down a deposit of a proportion of the value of the car. You pay the rest back in instalments at a fixed rate of interest over a set period of time.

Car dealers look at your credit rating and financial history to decide whether to lend to you. With HP, you do not own the vehicle until you make the final payment.

Personal contract purchase (PCP)

Most car manufacturers offer personal contract purchase through car dealers or garages. It’s a popular form of car finance similar to HP, but the repayments are usually less as they don’t cover the full value of the car. Instead, you pay the difference between the initial buying price and the minimum guaranteed future value (MGFV) at the end of the contract. Dealers work out the MGFV from the age of the car at contract end and your estimated annual mileage.

When the contract ends, you can choose to purchase the car by paying the MGFV, part exchange it for a new car, or hand the car back to the dealer or garage.

 

	Hire Purchase	Personal Contract Purchase	Personal Loan
Required initial deposit	Usually requires a deposit	Usually requires a deposit	X
You own the car outright	X	X	✓
Car is yours at the end of the agreement	✓	X	✓
Fixed monthly payments	✓	✓	✓
Optional balloon (final) payment	X	✓	X
Excess mileage charges	X	✓	X
Secured against an asset (car)	✓	✓	X