How do you finance a car?

Couple choosing and buying car at car showroom.

You’ve found your dream car, weighed up the finance options, checked your eligibility and you’re ready to put the plan into action. But what happens next?

You might know about the different types of car finance available but, once you’ve made a decision, how do you actually go about financing a car?

In this guide, we’ll run through the full process and everything you need to know, including how long it takes and what documents you’ll need to finance a car.

What is car finance?

Car finance is essentially a way to pay for a car if you don’t have the cash to-hand. For many, it’s a convenient way to get access to a newer or more desirable model, without needing to save up for it in advance.

Depending on the type of car finance you choose, there are a number of other implications around upfront payments, eligibility and the ultimate ownership of the car.

What are the main types of car finance?

When it comes to the types of car finance, there are a number of options available to you, each with its own benefits.

Broadly speaking, most car finance will either be in the form of a loan or a lease.

A loan allows you to buy the car up front with borrowed money, which you then repay to a lender in regular installments. A lease, on the other hand, is more like a long-term rental, in which you pay the lease provider on a monthly basis and then return the car to them once the lease period ends.

Here’s a quick summary of some of the most common types of car finance:

Personal Contract Hire (PCH) 

Personal contract hire, also known as car leasing, allows you to hire the car for a set period of time, at the end of which it is returned to the lease provider.

The amount you pay each month is based on an estimate of the car’s value at the end of the term, known as the Guaranteed Minimum Future Value (GMFV). Compared to other options, which base their rates on the current value of the car, this can result in cheaper monthly payments. You may be required to make a down payment when you first take out the contract.

You cannot purchase or own the car outright with a PCH agreement. This makes a personal contract hire a good option if you are not interested in owning the car, and instead plan to switch once the lease period ends. 

Personal Contract Purchase (PCP)

A personal contract purchase agreement works similarly to personal contract hire. The difference is that with PCP, you have the option to make a final “balloon payment” at the end of the term to buy the car outright. Just like personal contract hire, you’ll often be required to pay a small deposit upfront.

PCP can be worth considering if you’d like the option to buy at the end of the agreement, with the flexibility to switch to a new car if you’d prefer.

Hire Purchase (HP)

Hire purchase is effectively a loan taken out with the hire purchase provider, in which the debt is secured against the car itself.

You start by paying a deposit upfront, followed by a series of monthly installments until the repayment term is complete. At the end of the contract, you have the option to pay a small additional fee to purchase the vehicle outright.

It’s very similar to personal contract purchase (PCP), with the main difference being that the monthly payments are calculated based on the vehicle value at the start of the agreement. This can mean the monthly payments for hire purchase are higher than they would be for PCP.

The benefit to hire purchase is that the optional fee to purchase the car at the end of the term will generally be much lower than it would be with PCP. It’s also more commonly available for used cars, which can be harder to finance through PCP.

Personal Loan

If you’re sure you’d like to own the car outright, then a personal loan can be a cost-effective way to do this.

With a personal loan, you borrow the cash to pay for the car from a loan provider. You then repay the lender in monthly repayments, plus interest, until the debt is cleared.

A loan can either be secured or unsecured. An unsecured loan isn’t tied to any of your possessions and will mainly rely on your credit score as an indication of your past borrowing and reliability. A secured homeowner loan is tied to your property, giving the lender greater security and making your eligibility less dependent on your credit score.

It’s important to keep in mind that, with a secured homeowner loan, your home may be repossessed if you are unable to keep up with repayments.

By owning the car outright from the very beginning, you’re free to modify or sell it as you please, providing you remember to keep up with the loan repayments.

If you decide that a loan is the right option for you, then head over to our complete guide to personal loans to learn more about the process. For any of the other options, read on to learn what you’ll need to get started.

Man reading paper documents

What do you need to finance a car?

Once you’ve decided on the finance option that makes sense for you, it’s time to gather your documents and personal information ahead of applying. This information will be used as part of the credit check that any car finance provider will run to evaluate your eligibility.

Here’s what you’ll need to get started:

Driving license / proof of identity

You’ll need to provide some proof of identity when applying for car finance.

A valid driver’s license, either provisional or full, is the easiest and most widely-accepted form of photo ID for this. In some cases you can also use your passport, which may be accepted by some lenders, but not all.

If your license has expired or become invalid, you can update your driving license ID card on the DVLA website. This has everything you need to bring your ID up to date.

Proof of income

As well as proof of ID, you’ll also need to provide evidence of your income.

If you’re in full-time or part-time employment, then 3 months’ worth of recent payslips or bank statements will generally be enough.

If you’re self-employed, then bank statements will usually be accepted.

In some cases, providers may need to call your employer—for example if you’re unable to provide payslips—in order to confirm that you’re employed there. Your employer won’t be required to pass on any personal information beyond confirming your employment.

Any benefits you receive can also be counted as part of your income, though you’ll need to provide evidence that at least half of your income is from some form of employment. 

Address history

Finally, you’ll need to provide evidence of your previous addresses. This will typically be your addresses over the past 3 years, but in some cases may be more.

If for any reason you don’t have 3 years of address history, perhaps because you have recently moved to the UK from abroad, then you should provide details of your previous overseas addresses. Finance providers may choose  to run an overseas check on the addresses as part of their process.

What to consider before committing to car finance

Once you’ve got your documents ready, you’re almost ready to set the process in motion. Before you do though, it’s worth taking a moment to review your plan and consider the following:

Type of loan or car finance

Are you choosing the best car finance option for your circumstances?

Things to keep in mind might include:

  • Whether you want to own the car eventually, and how likely this is
  • Whether you’d prefer lower monthly payments but a higher “option to purchase” fee
  • Whether a mileage limit would cause issues for your planned use of the car
  • Your credit score

Budget and affordability

Are your planned monthly repayments affordable?

It might be worth taking a look at your current monthly spending, and seeing how much you have left once your regular payments like rent, bills, and groceries have come out.

Is the amount remaining comfortably and reliably higher than the estimated monthly repayments for your chosen finance option? If so, then it’s generally a sign that you could afford the payments within your current monthly spending tendencies.

It’s also important to think about the long-term affordability of the finance plan. As an exercise, it might help to imagine how you’d cover the payments if you were to unexpectedly lose your source of income for three months, for example.

Credit score

A credit check will be required during the application process for any form of car finance.

Your credit score is a value that lenders and finance providers use to evaluate your borrowing history, to decide whether you meet their eligibility criteria.

A high credit score, achieved with a strong history of borrowing and repaying on-time, will increase your likelihood of approval. It may even help to improve the rates you are offered by the finance provider.

If you have a lower credit score, it doesn’t necessarily mean you won’t be able to take out the finance agreement, but lenders may require higher rates or stricter terms. There are even some providers that focus entirely on providing car finance options for bad credit. You can learn more about improving your credit score in our complete guide.

As a credit broker, we make it easy to browse multiple lenders at once. To do so, you just need to provide some details about yourself and what you’re looking for in our eligibility checker. We’ll then highlight the lenders that are suitable for you.

Car Sales Manager Giving New Auto Key To Family Couple Buying New Vehicle

How long does it take to get car finance approved?

Once you’ve decided on a lender and have weighed up the considerations, it’s time to apply. The lender will then require some time to evaluate your application and run a hard check on your credit report, following which it will make a decision.

It’s typical for car finance to require 1-2 days to be approved. However, this will vary, depending on the lender, the value of the car, and your circumstances.

Once approved it will simply be a case of reviewing the terms, considering the affordability, and deciding whether you’re happy to proceed. If you are, then you can accept the agreement and the car will be yours.

How do you finance a car?

To recap, here’s how to finance a car in 10 simple steps:

  1. Decide which car you want
  2. Decide what type of finance you would prefer:
    • Personal contract hire (car lease)
    • Personal contract purchase
    • Hire purchase
    • Personal loan
    • Alternative (such as conditional sale, or others)
  3. Gather your personal information:
    • Proof of ID (driver’s license)
    • Proof of income (3 months’ worth of payslips or bank statements)
    • Proof of address (letters from your local council, NHS, or utility bills)
  4. Check your eligibility
  5. Choose a car finance lender
  6. Apply for finance (the lender will run a hard check on your credit report)
  7. Receive a finance agreement proposal from the lender, if approved
  8. Take a moment to consider the following:
    • Is this type of car finance the best for your needs?
    • Are the monthly repayments affordable?
  9. Agree to the terms with the lender
  10. Drive away in your newly-financed car

And that’s it. It’s really that simple!

Once you’ve accepted the terms and entered the finance contract, you will need to make the required monthly payments, as set out in the terms of the agreement.

Where can you apply for car finance?

To get started with applying for car finance, you can enter your details into our eligibility checker and start comparing car finance lenders for car loans and hire purchase agreements right away.