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Car finance, at a glance
Car finance can help you spread the cost of buying a new or used car.
This guide explains how each option works, what to compare before applying, and how to decide which type of car finance may suit your budget.
You can also compare car finance options through our partner Loanitt.
What is car finance?
Car finance offers a way to buy or hire a car by paying back what you borrow with interest over an agreed term. It allows you to spread the cost of the vehicle and plan your repayments.
Saving up the amount needed to buy a vehicle isn’t possible for most, which is why car finance is so popular.
If it’s time to get a new car and you’re short on funds, car finance could be the answer.
Types of car finance
Whether you choose a new or used car, there’s a choice of ways you can pay for your vehicle if you cannot pay for your car upfront. Although there are differences between them, most finance options will need an initial deposit; then you’ll make monthly payments over an agreed term.
Here are three ways you can spread the cost of your car purchase, including the pros and cons of each.
Personal contract plans (PCP)
How do personal contract plans work?
A personal contract plan or personal contract purchase offers a way to hire a vehicle for a period of time and then decide whether to buy it or give it back.
A PCP is made up of:
- A deposit, usually between 10% and 35%
- Monthly payments over a set term to cover a portion of the car’s value
- The final lump sum which is agreed upon upfront. You’ll have to pay this amount to own the car, but you may choose another option.
The deposit
Depending on the car’s value, raising even a minimum cash deposit (typically 10%) can be difficult.
Many people trade in their old vehicle for the deposit, which can be topped up as required.
The bigger your deposit, the less credit you’ll need and the lower your repayments will be. However, if the interest rate on your savings is higher than the finance rate, you’ll lose money in interest.
The finance agreement
You pick a term, usually between one and four years, to pay off part of the purchase price at an agreed interest rate.
Also agreed upfront is the car’s guaranteed minimum future value (GMFV), which must be paid at the end of the term if you want to keep the vehicle.
This is a large lump sum, often called a balloon payment. There are terms attached to the GMFV, for example:
- The car’s condition: If it’s not kept in good condition, you may be charged for the reduction in value or for repairs.
- Its mileage: You have to estimate your annual mileage when you take out a PCP and pay for any extra miles you do over the agreed limit at the end. The amount per mile is set out in the agreement.
You may also have to get your car serviced regularly with an approved dealer.
PCP repayments are lower than other types of finance because you’re not borrowing the car’s full value. Different ways to reduce your repayments include:
Although you’re only repaying a portion of the purchase price, you also pay interest on the GMFV.
When the finance agreement ends
Once you’ve paid off the finance, you can choose to:
- Buy the car: Pay the final GMFV payment, and the car is yours.
- Return the car: If it’s in good condition and within the mileage limits, there should be nothing to pay, but your dealer will check this.
- Start a PCP on a new car: Return the old car and pick a new one. If the old car is worth more than the GMFV, you can use the difference towards your deposit.
Can you switch dealers with PCP?
Yes. You’re free to go to a different dealership if you want to switch to a new make of car. They’ll call the finance company to find out what’s owed on the car and then value the car for you.
If it’s worth more than the guaranteed minimum future value, you can roll this credit into your next PCP, but if it’s worth less, you’ll have to decide whether to:
- Pay off the debt and start a fresh PCP
- Return the car and pay what’s owed
- Carry the debt forward into a new PCP
Carrying the debt forward could lead to a bigger debt further down the line that may be unmanageable.
What to consider
To help you decide if PCP is right for you, here’s a quick summary of the pros and cons:
Pros
Cons
Switcher tip: PCP can look cheaper month to month, but always check the final balloon payment, mileage limits and car condition rules before comparing it with HP or a personal car loan.
Hire purchase (HP)
How does Hire Purchase work?
With an HP agreement, you hire the vehicle from the finance company during the term and only become the owner when the term ends.
You usually pay:
- a 10% deposit
- the finance amount plus interest
- a small documentation fee and purchase fee
You make regular repayments over a term of up to six years to cover the purchase price (minus your deposit) plus interest, and when the term ends, the car is yours.
Can you end the agreement early?
Yes. If you don’t want to keep the car, you can give the vehicle back at any time. However, you’ll need to pay off 50% of its value (if you haven’t already), even if you return the car before the halfway point.
The car must also be in good condition, or you’ll be charged for any necessary repairs. Here’s more about ending your HP agreement early on the CCPC.i.e. website.
What to consider
Here’s some advantages and disadvantages to weigh up when considering a hire purchase to finance your car.
Pros
Cons
What is the difference between PCP and HP?
You can pay less of the purchase price during a PCP agreement, meaning you may owe a considerable amount more at the end.
With HP you can own the car at the end of your finance term, whereas with PCP you will have three options:
- Hand the vehicle back
- Pay off the outstanding balloon payment to own outright
- Refinance it for a new car
Switcher tip: HP usually means higher monthly repayments than PCP, but there’s no large final balloon payment if you want to own the car at the end.
Car loans
How do car loans work?
One of the simplest ways to finance your car is to use a personal loan to buy your vehicle. You can apply online or through your bank, building society or credit union.
It’s easier to shop around for the best rate because you’re not tied to a dealership. You use the loan as cash to buy the car.
The most significant difference with a car loan is that you own the car straight away rather than initially hiring it. This allows you to sell the vehicle and pay off the loan early if you wish.
There’s no deposit to pay, and you can borrow the total amount and pay it back over a term of one to seven years with interest.
What to consider
Here’s the main advantages and disadvantages of choosing a personal loan to finance your car:
Pros
Cons
Can you get green car loans for electric cars?
Thinking of going electric? Electric and hybrid cars can be cheaper to tax and may cost less to run, depending on the model, mileage and charging costs.
Some lenders offer green car loans specifically for eligible electric or plug-in hybrid cars. These may come with lower rates than standard personal loans, but eligibility rules vary by lender.
An Post Money and the Credit Union both offer green car loans specifically for the purchase of grant eligible electric cars.
Before applying, check which vehicles qualify, whether the rate is fixed or variable, the APR, total cost of credit, loan term, monthly repayments and whether you need to provide a quote, invoice or proof of purchase.
Is a personal loan the same as a car loan?
A car loan is often a type of personal loan used to buy a car. You borrow a set amount, buy the car outright, and repay the lender in monthly instalments with interest.
The main difference is the purpose of the loan. A personal loan can be used for lots of things, while a car loan is specifically used to buy a vehicle:
Switcher tip: A personal car loan can give you ownership from day one, but compare the APR, monthly repayment and total repayment amount before applying.
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Car finance example: how much could borrowing cost?
To show how car finance costs can vary, here’s an illustrative example based on a loan used to buy a car.
This is only one way to finance a vehicle; PCP and hire purchase work differently, especially when it comes to deposits, ownership and final payments.
| Example terms | Amount | |
|---|---|---|
| Loan amount | €18,000 | |
| Term | 5 years / 60 repayments | |
| Finance type | Car loan | |
| Example APR (Annual Percentage Rate) | 6.4% | |
| Monthly repayment | €349.82 | |
| Total repayment | €20,989.20 | |
| Total cost of credit | €2,989.20 |
In this example, the borrower would own the car from day one because the finance is a personal loan. With PCP or hire purchase, ownership works differently, so it’s important to compare the monthly repayment, deposit, total cost of credit, ownership rules and any final payment before choosing.
Illustrative example only. Actual rates, repayments and terms may vary. Always check the latest details with a comparison site, lender or finance provider before applying.
What to compare before choosing car finance
There are lots of things to consider before choosing how to finance your car. Monthly repayments are important, but they don’t show the full cost of the agreement.
Before choosing PCP, hire purchase or a car loan, compare:
Applying for car finance
Before applying, it helps to know where car finance is available, what information you may need to provide, how long approval can take and whether a credit check will be carried out.
Where to get a car finance agreement
It’s common to take out finance through the dealer you buy the car from (if they offer it) or via the finance company they’re associated with, but that’s not your only option.
There are also some online car sales and finance companies that offer a one-stop-shop. Here’s how it might work:
- Pick a car from their network of dealers
- Apply for credit with them
- Once approved, they’ll tell the dealer you have the funds ready to buy the car
If you source a car from elsewhere, you can go direct to a car finance company with the details of the car you want to buy and apply for credit through them.
Some car dealerships offer finance options through multiple financial institutions, which could help you get a better deal.
Details of who is providing the finance are shown in the agreement you sign, and any queries should be directed to them.
How do you apply for car finance?
You can usually apply online, or if it’s through a dealership, the salesperson will complete the application for you at the showroom, and you’ll need to sign to agree to the terms and conditions.
You’ll need to provide information about:
- The vehicle
- The finance and loan term
- Your identity
- Your bank details
- Your employment
- Your income and outgoings
- Your credit history
The information you give, alongside a credit check, will be used to decide whether to approve you and what interest rate you’re offered.
How quickly will you be approved?
It usually takes between 15 minutes and 3 hours to find out if you’ve been approved, depending on the dealership, finance company or bank.
This makes it possible to take the car home on the same day in some circumstances.
Can you buy a used car on car finance?
Yes, you can, but you’ll need to check it doesn’t exceed the maximum age allowed by the finance provider when you take out the finance.
Will a credit check be carried out?
Yes. You should limit the number of applications you make for car finance, or it could harm your credit score.
If you’re worried about your credit history, you can check your credit record for free.
Can you pay car finance off early?
Yes. This is usually an option and can be a good way of saving on interest, but always check if there are any early repayment charges.
Which type of car finance might suit you?
-
Choose PCP: If you want lower monthly repayments and may change car regularly.
-
Choose HP: If you want to own the car after the final payment and avoid a large balloon payment.
-
Choose a car loan: If you want to own the car from day one and avoid mileage restrictions.
-
Choose a green car loan: If you’re buying an eligible electric or hybrid car.
Be cautious with bad credit finance if the APR (Annual Percentage Rate) or total cost of credit is high.
Other finance options and considerations
Some car finance deals are designed for specific situations, such as no-deposit finance, 0% finance, electric cars or applicants with poor credit.
These options can be useful, but they may come with extra conditions, higher costs or stricter eligibility rules, so it’s important to compare the full agreement before applying.
Can you get 0% or no-deposit car finance?
Some dealers or finance providers may advertise 0% car finance or no-deposit car finance, but these deals can come with conditions.
With 0% car finance, check whether the car price, deposit, fees or final payment are higher than they would be with another deal. A 0% rate does not always mean it’s the cheapest option overall.
No-deposit car finance may reduce your upfront cost, but it usually means borrowing more. This can increase your monthly repayments and the total amount you repay over the term.
Before applying, compare the APR, monthly repayment, total cost of credit, deposit, term length, fees and any final balloon payment.
Can you get car finance with bad credit?
You may be able to get car finance with bad credit, but approval is not guaranteed and the cost of borrowing may be higher.
Lenders usually look at your income, outgoings, credit history and whether the repayments are affordable. If you have missed payments, arrears or a poor credit record, you may be offered a higher APR or fewer finance options.
Before applying, you can improve your chances by:
If you’re worried about your credit history, you can check your credit record for free before applying.
Car finance FAQs
What will my monthly repayments be?
Your monthly repayments will depend on how much you borrow, the interest rate, the loan term, the type of finance you choose and your credit history.
PCP, hire purchase and personal car loans can all have different repayment structures, so compare the monthly repayment, APR and total cost of credit before applying.
Some lenders and finance providers offer calculators to help you estimate repayments. Make sure you can comfortably afford the repayments for the full term to avoid falling into arrears.
Is insurance cheaper if you finance your car?
No, car insurance is not usually cheaper because you finance your car. The price of your car insurance is based on factors such as your age, address, driving history, car type and level of cover.
However, some finance providers may require you to have fully comprehensive insurance while the car is under finance.
Can I finance a used car?
Yes, you can usually finance a used car, but lenders and finance providers may set rules around the car’s age, mileage, value and condition.
If you’re buying a used car, check whether there is already finance outstanding on it and make sure you understand the APR, monthly repayment, total cost of credit and ownership rules before applying.
Can I get car finance if I’m self-employed?
Yes, self-employed applicants may be able to get car finance, but you may need to provide extra proof of income, such as bank statements, accounts or tax documents.
Approval will depend on the lender’s criteria, your credit history, income, outgoings and whether the repayments are affordable.
What documents do I need for car finance?
You may need proof of identity, proof of address, bank details, employment or income details, and information about the car you want to buy.
If you apply for a specific car loan, green car loan or vehicle-linked finance, the lender may also ask for a quote, invoice or proof of purchase.
Can I sell a car on finance?
You usually cannot sell a car on PCP or hire purchase until the finance has been settled and you legally own the car.
If you bought the car with a personal loan, you usually own it from day one and can sell it, but you still need to repay the loan.