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Car finance explained

Everything you need to know about the wonderful world of car finance

Car finance can seem daunting and confusing. To take some of the stress out of buying a car, we want to explain the finance options and what each of them really means.

What is a car finance agreement?

If you buy a car using finance, there’s a credit agreement between you and the lender. This allows you to pay for the car over a period of time, with interest payable on the loan balance. This is what’s called a car finance agreement.

I want to buy a car – what are the different types of finance options available to me?

Whether you’re buying new or used, a car is a significant purchase. You can, of course, buy your next car outright if you’re lucky enough to have the funds available, but most people need to rely on a finance option. There are four main types of car finance available:

  • Personal loan

    One of the most popular ways to finance a new car. This involves borrowing money to fund the purchase, often from a bank or building society. When you buy the car, you instantly own the car. You then pay the loan back to the lender, with interest on top, over a time period to suit you. The amount of interest varies from lender to lender and usually depends on the duration of the loan, as well as your personal circumstances and credit score. This option is particularly good if you’re in it for the long haul and don’t intend to change cars very often.

  • Personal contract purchase (PCP)

    Here, you pay a deposit (usually around 10%) and then have fixed monthly repayments. During the contract, the car belongs to the finance company and your payments only cover depreciation. This type of car finance is ideal if you’d like flexibility at the end of the agreement, and also suits those who like to change and update cars fairly regularly. Once your contract ends, you have three options:

    1. Pay the remaining value of the car (often called a balloon payment) and keep the car
    2. Exchange the car
    3. Return the car to the supplier
    Find out more or apply
  • Hire purchase (HP)

    This is similar to PCP, in that a deposit is required, and there are fixed monthly payments. The car is owned by the HP company, and you are essentially only hiring it until you make the final payment. After this time, you own the car. Hire purchase is the only finance option offered by AA Car Finance.

    Find out more or apply
  • Leasing

    When you lease a car you’re essentially renting it, so you’ll never own it. You don't have the option to buy the car at the end of the contract. However, every two to three years you can change the car you’re driving. This is a great way to drive cars you couldn’t usually afford to buy. The payments you make are like a hire fee – they simply cover the car’s depreciation.

What’s the best car finance option for me?

If you’re looking at using finance to buy a car, first think about the type of deal you want. These include personal loan, lease, hire purchase and PCP. Once you’ve decided on the type, you need to choose a lender that offers the best deal for your needs. AA Car Finance only offers hire purchase.

AA Car Finance FAQs

Breakdown offer Terms and Conditions

Evolution Privacy Policy
AA Cars Privacy Notice
Customer terms & conditions
AA Car Finance and AA Cars are trading names of Used Car Sites Limited. Registered address: Fanum House, Basing View, Basingstoke, Hampshire, RG21 4EA. Used Car Sites Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 671360). AA Cars introduces AA Car Finance customers to Evolution Funding Limited. Evolution Funding Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 823324). Registered address: Thompson Close, Whittington Moor, Chesterfield, Derbyshire, S41 9AZ. Evolution Funding Limited and Used Car Sites Limited are credit brokers not lenders. Evolution Funding Limited is only able to offer a range of finance products from a group of carefully selected credit providers, which may be suitable for you and they will explain the key features of these products to you. AA Cars receives payment from Evolution Funding for introducing you to them. The amount AA Cars receives does not impact the amount that you pay the lender or the interest rate you are offered. The payment received is based on a fixed fee or a percentage of the amount you borrow, varying by lender, the amount you borrow and the term the loan is borrowed over. AA Cars will not charge you any fee for our services. Finance subject to status. Terms and Conditions apply. A guarantee may be required. Over 18’s only. PLEASE ENSURE YOU CAN AFFORD THE REPAYMENTS FOR THE DURATION OF A LOAN BEFORE ENTERING INTO A CREDIT AGREEMENT.

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