Car Finance

Main types of car finance

Most car finance falls into one of a few types, and the differences matter for what you pay and what you own:

• Hire purchase (HP) — you pay in instalments and own the car once the final payment is made
• Personal contract purchase (PCP) — lower monthly payments, then a choice at the end to pay a large “balloon” payment to keep the car, hand it back, or part-exchange
• Personal loan — you borrow and buy the car outright, so you own it from the start
• With HP and PCP the finance company owns the car until the agreement’s conditions are met, which limits your right to sell it

PCP in more detail

PCP is popular because the monthly payments are usually lower than HP, but that is because you are not paying off the whole value of the car. A large optional final payment (the balloon payment) is due if you want to own it at the end. Mileage limits and charges for damage can also apply if you hand the car back, so read the agreement carefully.

The motor finance redress scheme

Many older car finance deals paid the dealer or broker a commission that the customer was not told about. Following a Supreme Court ruling in 2025, the FCA has confirmed an industry-wide redress scheme covering agreements where certain commission arrangements were not properly disclosed. It broadly relates to agreements taken out over a period running from 2007 up to 2024.

At the time of writing the scheme is subject to ongoing legal challenge, and parts of it have been suspended, so timings may change. You do not need to pay a claims management company or law firm — you can complain directly to your lender for free.

Voluntary termination: your right to hand the car back

On a regulated hire purchase (HP) or PCP agreement you have a statutory right of “voluntary termination” under sections 99 and 100 of the Consumer Credit Act 1974. You can end the agreement early and return the car, and your liability is capped at half of the total amount payable under the agreement.

If you have already paid at least 50%, you can hand the car back without paying any more; if you have paid less, you pay only the difference up to the halfway point. You can still exercise the right before reaching 50% — you are not required to have paid half first. You must return the car in reasonable condition, so the lender can charge for damage beyond fair wear and tear or for agreed excess mileage. Voluntary termination is a specific legal right and is not the same as “voluntary surrender”, which can leave you owing more.

Before you sign car finance

Check the total amount payable, the APR, the length of the agreement and any final payment or mileage limits. Confirm the lender is authorised on the FCA Register. This is general information, not advice on a specific deal — a free service such as MoneyHelper can help you weigh up your options.