Understanding the Basics of Car Credit
Car Credit needn’t be confusing. Almost 2.5 million people purchased a car on finance in 2025. Some people buy cars for business, others for social or commuting purposes, and in a lot of situations people don’t have the full value of the vehicle available.
That’s where car credit comes in – it’s a simple way of making smaller payments over a period of time by effectively borrowing money from a lender, usually a bank. The lenders charge interest on this amount, varying between around 7% up to 50% and above. Our Representative APR is reviewed regularly – read about Our Representative APR here.
What is Car Credit?
Car Credit is a type of vehicle finance tailored to those wanting to make payments over an extended period of time. Interest is charged on the amount you borrow, so you’ll repay more than you initially borrow.
Car Credit vs Car Finance: Are They Different?
Car Credit and Car Finance are effectively the same and can be used virtually interchangeably. Credit can sometimes be used to refer to a more simple car finance agreement, whilst “car finance” is a broader term.
Understanding the Basics of Car Credit
Hire Purchase
Perhaps the most traditional of finance agreements – a Hire Purchase (HP) agreement works by borrowing money from a lender (on which interest is charged), making recurring monthly payments with the option of owning the vehicle at the end of the agreement. In most cases, your Hire Purchase finance agreement will include an initial deposit in the region of 5-15%, and a balloon payment at the end. For example, to finance a vehicle worth £10,000, a 10% deposit of £1,000 means you’re borrowing £9,000. It’s important to note that not all finance agreements require a deposit. Over a 24 month period, interest is applied to that value. Using our representative APR of 22.6%, the total amount due by the end of the agreement is £11,034.
Often, this is spread evenly across the period, £459.75 per month. There are lenders who will offer deals that require smaller monthly payments, with the option of a Balloon Payment at the end. If, for example, a lender allowed a monthly repayment of just £300 per month, a balloon payment of £1,434 is due at the end of the term to secure ownership of the vehicle.
Some drivers choose to make a larger deposit at the beginning of their agreement to lower their monthly repayments. Critically for Hire Purchase – the value of your agreement is determined based of the value of the vehicle at the start of the finance deal.
Personal Contract Purchase
A Personal Contract Purchase (PCP) agreement is very similar to a Hire Purchase (HP) agreement, a key difference however lies in the valuation of the vehicle. Whilst with HP, you borrow based on the current value of the vehicle, a PCP finance deal is based on the Guaranteed Minimum Future Value (GMFV) – how much the vehicle is expected to depreciate by the end of the agreement.
At the end of a PCP deal, this lingering GMFV can either be paid-off as a final balloon payment to secure ownership of the vehicle, or to use as a deposit on a new PCP deal on a different vehicle. Alternatively, drivers can hand back the keys, and return the vehicle. Personal Contract Purchase is an effective way of driving a vehicle without the commitment to own the vehicle outright whilst maintaining lower monthly payments.
Personal Contract Purchase agreements are frequently subject to mileage restrictions/ additional charges.
Conditional Sale Agreement
Conditional Sale is once again similar to Hire Purchase, but you commit at the beginning of the agreement to owning the vehicle at the end.
In all cases, the lender owns the vehicle for the duration of the finance agreement.
Credit Rating
In order to lend you a sum of money, the banks need to assess the risk in allowing you to borrow those funds. They primarily use your credit rating (sometimes called a credit score) to judge whether or not to lend you the money.
What else do lenders look at?
Lenders can carry out two types of credit check called a soft-check or hard-check. Soft-checks don’t affect your credit score, whilst hard-checks leave a record that your credit profile has been looked at. Lenders may also consider your employment history, current financial situation, even your address history and whether you’re on the electoral roll.
Does Car Finance include insurance and tax?
No. Car Credit and Car Finance packages are entirely separate from vehicle insurance, which is a legal requirement in the UK. Vehicle Excise Duty or Car Tax is also not covered by car finance deals – this is the responsibility of the driver.
Our Finance Products
At Kandoo Car Credit, we work with a wide panel of trusted lenders to find you the best deal possible. Whether it’s Hire Purchase, Personal Contract Purchase or a Conditional Sale Agreement, the car finance deals that we broker are specially suited to your needs.
In most cases, you own the vehicle at the end of the finance agreement – though some car finance deals offer you the opportunity to refinance and effectively trade-in for a different vehicle. Speak to Kandoo Car Credit‘s team of experts for tailored advice on car credit and car finance deals.