Used Car Finance
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What is Used Car Finance?
Used car finance is a specialised lending arrangement that enables individuals to purchase a second-hand vehicle by borrowing money from a financial institution or specialist lender, rather than paying the full purchase price upfront. This form of credit allows consumers to spread the cost of a pre-owned car over a predetermined period, typically ranging from 12 to 60 months, through regular monthly payments. The used car finance market represents a substantial portion of the UK automotive finance sector, with over 7.6 million used car transactions recorded in 2024 according to the Society of Motor Manufacturers and Traders, and the Finance & Leasing Association reporting a 6% growth in the value of new used car finance business in July 2025.
The fundamental principle of used car finance involves a lender providing funds to cover the cost of a second-hand vehicle, which the borrower then repays over time with interest. However, used car finance differs significantly from new car finance in several key aspects. Interest rates for used car finance are typically higher than those offered for new vehicles, reflecting the increased risk associated with older vehicles that have already experienced depreciation. The Annual Percentage Rate (APR) for used car finance varies based on factors such as the vehicle’s age, mileage, condition, the borrower’s creditworthiness, and the loan amount. It is important to understand that the total amount repaid will exceed the original loan amount due to interest charges, making it essential to consider the overall cost when evaluating finance options.
The used car finance market offers several distinct financing options, each tailored to meet different consumer needs and the unique characteristics of second-hand vehicles. Hire Purchase (HP) remains the most straightforward option for used cars, where the borrower makes fixed monthly payments and gains full ownership of the vehicle upon completion of all payments. Personal Contract Purchase (PCP) is less commonly available for used cars, particularly older models, as the residual value calculations become more complex and uncertain. Personal loans provide a popular alternative route for used car finance, where the borrower receives funds to purchase a vehicle outright and repays the loan independently of the car itself, offering complete ownership from the outset.
The used car finance industry operates within the same regulatory framework as new car finance, being heavily regulated by the Financial Conduct Authority (FCA) to ensure consumer protection and fair lending practices. Recent regulatory developments have highlighted the importance of transparency in commission arrangements between lenders and brokers, with a legal ruling in August 2025 addressing concerns about undisclosed commission payments that particularly affected the used car market. This regulatory oversight ensures that consumers receive clear information about the terms and costs of their finance agreements, regardless of whether they are purchasing new or used vehicles.
When considering used car finance, it is crucial to conduct a thorough assessment of both your financial circumstances and the specific vehicle you intend to purchase. Lenders are required to perform affordability assessments to ensure responsible lending, but borrowers must also honestly evaluate their budget and consider potential changes in their financial situation. The age and condition of used vehicles can present additional considerations, such as higher maintenance costs and potential reliability issues. Missing payments can result in serious consequences, including damage to your credit score and, in severe cases, repossession of the vehicle, which may have depreciated significantly since purchase.
All lending is subject to status and affordability assessments. Consider seeking independent advice from MoneyHelper.org.uk before making borrowing decisions.
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£100,000
Loan Term
Total repayment
Monthly repayment
RAPR
Interest
32 Months
£119,173.27
£3,819.66
14.4%
14.4% p.a (Fixed)
The rate you get will depend on your individual, financial circumstances. Late repayment can cause you serious money problems. For more information, Go to moneyhelper.org.uk
How Used Car Finance Works?
Used car finance allows you to spread the cost of a second-hand vehicle over a set period, making it a more manageable way to fund your purchase of a pre-owned car. Instead of paying the full amount upfront, you make regular monthly payments to a lender over a term that typically ranges from 12 to 60 months. This type of financing has become increasingly popular in the UK’s substantial used car market, which recorded over 7.6 million transactions in 2024, with the consumer used car finance market showing a 6% growth in the value of new business in July 2025 compared to the previous year.
The used car finance process differs from new car finance in several important ways. When financing a used vehicle, lenders must consider factors such as the car’s age, mileage, service history, and current market value, which can affect both the loan amount and interest rate offered. The depreciation curve for used cars is typically less steep than for new vehicles, as the most significant depreciation has already occurred, but this also means that residual values can be more difficult to predict accurately.
There are several types of used car finance available, each with its own structure and terms tailored to the second-hand market. Hire Purchase (HP) is the most common option for used cars, where you make fixed monthly payments and will own the car outright at the end of the term. Personal Contract Purchase (PCP) is less frequently available for used vehicles, particularly those over a certain age, as lenders find it challenging to guarantee future values for older cars. Personal loans represent a popular alternative for used car purchases, allowing you to buy the vehicle outright and own it from day one while repaying the loan separately.
It is crucial to understand that all forms of used car finance are a significant financial commitment, with additional considerations specific to second-hand vehicles. Lenders will assess your creditworthiness and affordability before approving a loan, but they will also evaluate the specific vehicle you wish to purchase. This involves a review of your credit history, income, and outgoings, as well as the car’s age, condition, and market value to ensure you can comfortably meet the repayment schedule. Missing payments can have serious consequences, including damage to your credit score and, in some cases, repossession of the vehicle, which may have depreciated further since purchase. Therefore, it is essential to carefully consider both your budget and the specific used car you intend to finance, and seek independent financial advice if you are unsure about any aspect of the agreement.
Benefits of Used Car Finance
Opting for used car finance can offer several advantages for consumers looking to purchase a vehicle without paying a large lump sum upfront. One of the primary benefits is the ability to spread the cost over a manageable period, making car ownership more accessible. This can allow you to purchase a higher-specification vehicle than you might be able to afford with cash. Furthermore, financing a used car can be a more cost-effective option than buying a new car, as used vehicles have already undergone the most significant period of depreciation.
Another advantage is the flexibility offered by different finance products. With options such as Hire Purchase (HP) and Personal Contract Purchase (PCP), you can choose a repayment plan that aligns with your financial situation and long-term goals. For instance, PCP agreements often result in lower monthly payments, providing more budgetary flexibility. Additionally, having a structured repayment plan can help with budgeting and financial planning. However, it is important to remember that while finance makes car ownership more accessible, it is a loan that accrues interest, increasing the total amount you pay for the vehicle. You must also consider the risks, such as the potential for negative equity, where you owe more on the loan than the car is worth.
Disadvantages of Used Car Finance
While used car finance can be a convenient way to purchase a vehicle, it is essential to be aware of the potential drawbacks and risks involved. A thorough understanding of these disadvantages will enable you to make a more informed decision and determine if this is the right financial commitment for you. The risks associated with car finance should be given equal, if not greater, consideration than the benefits.
Financial Risks and Long-Term Costs: One of the most significant disadvantages of any form of finance is the total cost. While you are spreading the cost of the car, you will almost always pay more than the vehicle’s ticket price due to interest charges. The Annual Percentage Rate (APR) reflects the interest rate and any additional fees, and this can add a substantial amount to the overall cost of the car. It is also important to be aware of the risk of negative equity. This occurs when the amount you owe on the finance agreement is greater than the current market value of the car. This can be a particular problem if you need to sell the car or if it is written off in an accident, as you may have to cover the shortfall between the insurance payout and the outstanding finance.
Furthermore, missing payments can have severe consequences. Not only can it lead to late payment fees and additional charges, but it will also be recorded on your credit file, which can damage your credit score. A lower credit score can make it more difficult and expensive to obtain credit in the future. In the worst-case scenario, if you persistently fail to make payments on a Hire Purchase or Conditional Sale agreement, the lender has the right to repossess the vehicle. It is crucial to have a stable income and a realistic budget to ensure you can meet all your repayment obligations throughout the term of the agreement.
Ownership and Flexibility Limitations:
With most types of car finance, such as Hire Purchase (HP) and Personal Contract Purchase (PCP), you do not own the vehicle until you have made all the required payments, including the final balloon payment in the case of PCP. This means that you cannot sell or modify the car without the lender’s permission. There may also be restrictions on the vehicle’s use, such as mileage limits, particularly with PCP agreements. Exceeding these limits can result in significant excess mileage charges at the end of the term.
Another consideration is the lack of flexibility. Car finance agreements are legally binding contracts, and it can be difficult and expensive to exit them early. While you have the right to voluntarily terminate the agreement once you have paid 50% of the total amount payable, this is not always the most cost-effective option. If your circumstances change and you are no longer able to afford the payments, you may face financial difficulties. Therefore, it is essential to consider the long-term nature of the commitment and to have a contingency plan in place for unexpected life events.
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FAQs (Frequently Asked Questions) About Secured Business Loans
What is the difference between Hire Purchase (HP) and Personal Contract Purchase (PCP)?
Hire Purchase (HP) and Personal Contract Purchase (PCP) are the two most common types of car finance in the UK. With a Hire Purchase agreement, you will typically pay a deposit followed by fixed monthly payments over an agreed term. At the end of the term, once all payments have been made, you will own the car outright. This is a straightforward way to finance a car if your goal is ownership.
PCP, on the other hand, offers more flexibility. You will also pay a deposit and make monthly payments, but these payments are typically lower than with an HP agreement because they cover the car’s depreciation rather than its full value. At the end of the term, you have three options: you can make a final ‘balloon’ payment to own the car, you can return the car to the lender, or you can use any equity you have in the car (if it is worth more than the balloon payment) as a deposit for a new finance agreement. This makes PCP a good option if you like to change your car regularly.
Can I get used car finance with a poor credit history?
Hire Purchase (HP) and Personal Contract Purchase (PCP) are the two most common types of car finance in the UK. With a Hire Purchase agreement, you will typically pay a deposit followed by fixed monthly payments over an agreed term. At the end of the term, once all payments have been made, you will own the car outright. This is a straightforward way to finance a car if your goal is ownership.
PCP, on the other hand, offers more flexibility. You will also pay a deposit and make monthly payments, but these payments are typically lower than with an HP agreement because they cover the car’s depreciation rather than its full value. At the end of the term, you have three options: you can make a final ‘balloon’ payment to own the car, you can return the car to the lender, or you can use any equity you have in the car (if it is worth more than the balloon payment) as a deposit for a new finance agreement. This makes PCP a good option if you like to change your car regularly.
What happens if I miss a payment on my car finance?
Missing a payment on your car finance agreement can have serious consequences, and it is important to act quickly if you find yourself in this situation. The first thing you should do is contact your lender as soon as possible. They may be able to offer a solution, such as a temporary payment holiday or a restructuring of your payments. It is always better to be proactive and communicate with your lender rather than ignoring the problem.
If you miss a payment, it will be recorded on your credit file, which can damage your credit score and make it harder to get credit in the future. You may also be charged a late payment fee. If you continue to miss payments, the lender may take further action, which could ultimately lead to the repossession of the vehicle. It is a serious matter, and you should seek free and impartial debt advice from organisations such as MoneyHelper or StepChange if you are struggling to make your payments.
Can I sell a car that has outstanding finance?
No, you cannot sell a car that has outstanding finance without first settling the finance agreement. Until you have made all the payments and the finance is cleared, the car legally belongs to the finance company. Selling a car with outstanding finance is illegal and could result in you facing legal action. It is essential that you clear the finance in full before you attempt to sell the vehicle.
To sell the car, you will need to contact your finance provider to get a settlement figure. This is the amount you need to pay to clear the finance and take full ownership of the car. Once you have paid the settlement figure, the finance company will remove their interest in the vehicle, and you will be free to sell it. Some car-buying services may be able to help you with this process by clearing the finance on your behalf as part of the sale.
What is a balloon payment in a PCP agreement?
A balloon payment is a large, final payment that you will need to make at the end of a Personal Contract Purchase (PCP) agreement if you want to own the car. The balloon payment is also known as the Guaranteed Minimum Future Value (GMFV), and it is the estimated value of the car at the end of the finance term. This amount is set at the beginning of the agreement and is based on factors such as the car’s make and model, its age, and the agreed mileage limit.
The balloon payment is what makes the monthly payments on a PCP agreement lower than on a Hire Purchase (HP) agreement. This is because your monthly payments are only covering the depreciation of the vehicle, not its full value. At the end of the term, you have the option to pay the balloon payment and take ownership of the car, or you can hand the car back to the finance company. If the car is worth more than the balloon payment, you can use the difference (the equity) as a deposit on a new car.
Do I need a deposit for used car finance?
Whether or not you need a deposit for used car finance will depend on the lender and the specific finance product you choose. While some lenders may offer no-deposit finance options, providing a deposit is generally a good idea. A larger deposit will reduce the amount you need to borrow, which will, in turn, lower your monthly payments and the total amount of interest you pay over the term of the loan.
A deposit also reduces the lender’s risk, which can improve your chances of being approved for finance, especially if you have a less-than-perfect credit history. A typical deposit for used car finance is around 10% of the car’s purchase price, but you can choose to pay more if you are in a position to do so. It is important to factor in the deposit when you are budgeting for your new car.
How long does the car finance application process take?
The car finance application process can be very quick, and in many cases, you can get a decision in principle within minutes. The initial application is usually done online and involves providing your personal and financial details. Once you have submitted your application, the lender will perform a soft credit check to assess your eligibility. This will not affect your credit score.
If you are pre-approved and decide to proceed, the lender will then carry out a hard credit check and ask you to provide supporting documentation, such as proof of identity and income. The time it takes to get a final decision will depend on how quickly you can provide the necessary documents and how long the lender takes to verify them. In most cases, the entire process, from application to receiving the funds, can be completed within a few days.
What is a soft credit check?
A soft credit check, also known as a soft search or quotation search, is a preliminary credit check that lenders carry out to assess your eligibility for a loan. It provides the lender with an overview of your credit history but does not go into the same level of detail as a hard credit check. A soft credit check is not visible to other lenders on your credit report and does not affect your credit score.
This allows you to shop around for the best finance deals and compare offers from different lenders without worrying about damaging your credit rating. At LoanTube, we use soft credit checks to provide you with personalised loan offers from our panel of lenders. A hard credit check is only carried out when you have chosen a lender and decided to proceed with a full application.
Can I get car finance if I am self-employed?
Yes, you can get car finance if you are self-employed. The application process is slightly different from that for someone who is in employment, as you will need to provide different evidence of your income. Lenders will want to see evidence of a stable and regular income to be confident that you can afford the monthly repayments.
If you are self-employed, you will typically need to provide your last two or three years’ tax returns (SA302s) and your business bank statements for the last three to six months. This will give the lender a clear picture of your income and the financial health of your business. It is a good idea to have all your financial documents in order before you apply for finance to ensure a smooth and efficient process.
What is APR and how does it affect my loan?
APR stands for Annual Percentage Rate, and it is a measure of the total cost of your loan over a year. It includes the interest rate and any other charges or fees that are part of the loan agreement. The APR is expressed as a percentage, and it is a useful tool for comparing the cost of different loan offers. A lower APR means a cheaper loan.
The APR you are offered will depend on a number of factors, including your credit score, the amount you want to borrow, and the length of the loan term. If you have a good credit score, you are likely to be offered a lower APR. The representative APR is the rate that at least 51% of successful applicants will receive. However, the actual rate you are offered may be higher or lower than the representative APR, depending on your individual circumstances.
Can I pay off my car finance early?
Yes, you can pay off your car finance early, but you may have to pay an early settlement fee. The right to settle your finance agreement early is protected by the Consumer Credit Act 1974. To pay off your loan early, you will need to contact your lender and ask for an early settlement figure. This is the amount you will need to pay to clear the remaining balance on your loan.
The settlement figure will include the outstanding capital and any interest that is due. The lender may also charge you an early settlement fee, which is typically equivalent to one or two months’ interest. It is important to check the terms and conditions of your finance agreement to see what the early settlement charges are. In some cases, paying off your loan early can save you money in interest, but you will need to weigh this up against any fees you have to pay.
The APR you are offered will depend on a number of factors, including your credit score, the amount you want to borrow, and the length of the loan term. If you have a good credit score, you are likely to be offered a lower APR. The representative APR is the rate that at least 51% of successful applicants will receive. However, the actual rate you are offered may be higher or lower than the representative APR, depending on your individual circumstances.
What happens at the end of a car finance agreement?
What happens at the end of a car finance agreement depends on the type of finance you have. With a Hire Purchase (HP) agreement, once you have made all the monthly payments, you will own the car outright. There are no further payments to make, and the car is yours to keep, sell, or part-exchange.
With a Personal Contract Purchase (PCP) agreement, you have three options at the end of the term. You can make the final balloon payment and take ownership of the car. You can hand the car back to the finance company, provided it is in good condition and within the agreed mileage limit. Or, if the car is worth more than the balloon payment, you can use the equity as a deposit on a new car. It is important to consider your options carefully and decide which one is best for you.
What is a guarantor loan?
A guarantor loan is a type of loan where a third party, known as the guarantor, agrees to be responsible for the loan repayments if the borrower defaults. The guarantor is usually a family member or a close friend who has a good credit history and is a homeowner. A guarantor loan can be an option for people who are struggling to get approved for finance on their own, such as young people with a limited credit history or people with a poor credit score.
It is a big responsibility to be a guarantor, as you are legally liable for the debt if the borrower fails to pay. If the borrower defaults on the loan, the lender can pursue you for the money, and it could affect your own credit score. It is important that both the borrower and the guarantor fully understand the risks involved before entering into a guarantor loan agreement.
Do I need to have my car serviced at a main dealer?
If you have a car on a finance agreement, you will be required to keep the car in good condition and have it serviced regularly in accordance with the manufacturer’s recommendations. However, you do not necessarily have to have it serviced at a main dealer. Under the EU Block Exemption regulations, you are free to have your car serviced at an independent garage, as long as they use manufacturer-approved parts and follow the manufacturer’s service schedule.
It is important to keep a record of all your service history, as you will need to provide this to the finance company at the end of the agreement, especially if you have a PCP deal. If you do not have the car serviced regularly, it could affect its value and you may be charged for any damage that is not considered to be fair wear and tear.
What is voluntary termination?
If you have a car on a finance agreement, you will be required to keep the car in good condition and have it serviced regularly in accordance with the manufacturer’s recommendations. However, you do not necessarily have to have it serviced at a main dealer. Under the EU Block Exemption regulations, you are free to have your car serviced at an independent garage, as long as they use manufacturer-approved parts and follow the manufacturer’s service schedule.
It is important to keep a record of all your service history, as you will need to provide this to the finance company at the end of the agreement, especially if you have a PCP deal. If you do not have the car serviced regularly, it could affect its value and you may be charged for any damage that is not considered to be fair wear and tear.
What is fair wear and tear?
Fair wear and tear is the normal deterioration that occurs to a car through regular use. It is not damage that is caused by an accident or by negligence. When you return a car at the end of a finance agreement, the finance company will inspect it to check for any damage that is not considered to be fair wear and tear. You may be charged for any repairs that are needed to bring the car back to an acceptable condition.
Most finance companies use the British Vehicle Rental and Leasing Association (BVRLA) guidelines to assess fair wear and tear. These guidelines provide a clear definition of what is acceptable and what is not. It is a good idea to familiarise yourself with these guidelines and to inspect your car carefully before you return it. This will give you the opportunity to have any minor repairs carried out yourself, which may be cheaper than paying the finance company’s charges.
Can I get car finance for a private sale?
It is possible to get car finance for a private sale, but it can be more complicated than getting finance for a car from a dealership. Most lenders prefer to work with dealerships, as they are seen as a more reliable source of vehicles. However, some lenders will provide finance for private sales. You will need to find a lender that offers this service and be prepared for a more thorough application process.
The lender will want to carry out checks on the car to ensure it is not stolen, has no outstanding finance, and is in a roadworthy condition. They may also want to carry out a valuation to ensure you are not paying too much for the car. It is important to be aware that you will have less legal protection if you buy a car from a private seller than if you buy from a dealership.
What happens if the car is written off?
If your car is written off in an accident, you will need to inform your insurance company and your finance provider immediately. Your insurance company will assess the damage and, if they agree that the car is a total loss, they will pay out the current market value of the vehicle. This payment will be made to the finance company to settle the outstanding finance.
However, there may be a shortfall between the insurance payout and the amount you still owe on your finance agreement. This is known as a GAP (Guaranteed Asset Protection) insurance. If you have GAP insurance, it will cover the shortfall. If you do not have GAP insurance, you will be responsible for paying the difference. It is a good idea to consider taking out GAP insurance when you take out your finance agreement to protect yourself against this risk. Please be aware that not all lenders provide GAP.
What is GAP Insurance?
Guaranteed Asset Protection (GAP) insurance is a type of policy designed to cover the financial difference between a motor insurer’s settlement and either the original purchase price of a vehicle or the outstanding balance on a finance agreement. When a vehicle is declared a ‘total loss’, such as being stolen and not recovered, or deemed uneconomical to repair a standard motor insurance policy typically pays out the market value of the vehicle at the time of the incident. Due to depreciation, which can reduce a new car’s value by 15% to 35% in the first year and 40% to 60% over three years, this settlement is often less than the original purchase price. GAP insurance aims to cover this shortfall. Different types of GAP policies are available, including Return to Invoice, Vehicle Replacement, and Finance GAP. Whether GAP insurance is appropriate depends on individual circumstances, including the vehicle’s depreciation rate and the terms of any finance agreement.
Can I transfer my car finance to another person?
No, you cannot transfer your car finance to another person. A car finance agreement is a legally binding contract between you and the lender, and it is based on your individual circumstances and creditworthiness. The lender has assessed your ability to repay the loan, and they have not assessed the ability of another person to do so.
If you no longer want the car and someone else is willing to take over the payments, you will need to settle the finance agreement in full. The other person will then need to apply for their own finance to buy the car from you. It is important to follow the correct legal process to avoid any complications.
Where can I get independent advice about car finance?
It is always a good idea to seek independent advice before you enter into a car finance agreement. There are several organisations in the UK that provide free and impartial advice about money matters. MoneyHelper is a government-backed service that provides free guidance on a wide range of financial topics, including car finance. You can visit their website at moneyhelper.org.uk.
Other organisations that can provide free debt advice include StepChange Debt Charity and National Debtline. These organisations can help you if you are struggling with your finances and are worried about your ability to make your loan repayments. It is important to remember that you are not alone and that there is help available.
