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Car Finance Guides - Understanding How Vehicles Are Funded in the UK
There are several ways to fund a vehicle in the UK, and each works differently in terms of ownership, financial responsibility, and end-of-agreement outcomes.
This section provides clear, impartial guides to the most common types of car finance and vehicle funding. It is intended to help you understand how different agreements work, the key features to be aware of, and how funding choices can affect your wider motoring decisions.
These guides are informational only and do not recommend one funding method over another.
Common Types of Car Finance Explained
Below are simple guides to the most common ways drivers and businesses fund vehicles in the UK.
Each guide explains how the agreement works, its main features, and the advantages and limitations to consider.
What Is PCP Car Finance?
Personal Contract Purchase (PCP) is one of the most widely used ways to fund new cars in the UK. It offers lower monthly payments and a choice of options at the end of the agreement, including the option to buy the vehicle.
This guide explains:
- How PCP finance works in practice
- Ownership and end-of-term options
- Mileage and condition considerations
- Common misunderstandings about PCP
Read the guide: What is PCP car finance?
What Is Contract Hire (Car Leasing)?
Contract Hire, also known as Personal Contract Hire (PCH), allows you to use a vehicle for a fixed period without owning it. At the end of the agreement, the vehicle is returned to the leasing provider.
This guide explains:
- How leasing agreements work
- What is included in lease payments
- Mileage limits and wear-and-tear rules
- Who contract hire may be suitable for
Read the guide: What is Contract Hire?
What Is Hire Purchase (HP)?
Hire Purchase is a more traditional form of car finance offered by car dealers. Key features of HP include spreading the cost of a vehicle over fixed monthly payments, with ownership transferring at the end once all payments are made.
This guide explains:
- How HP differs from PCP Finance and leasing
- Ownership and payment structure
- Early settlement options
- Repossession and termination rights (known as ‘halves and thirds’)
Read the guide: What is a Hire Purchase agreement?
Comparing Car Finance Options
Some funding types can appear similar, at first glance, but carry very different responsibilities and risks.
Our comparison guides explain the key differences between common options, helping you understand how they compare and differ.
Popular comparisons include:
- PCP vs Contract Hire
- Leasing vs Buying outright (cash)
- PCP vs Hire Purchase
How Car Finance Can Affect GAP Insurance
The way a vehicle is funded can affect your financial position if it is written off or stolen.
Different finance agreements can result in:
- Different settlement amounts
- Different ownership or liability positions
- Potential shortfalls between insurer payouts and finance balances
This is why some types of car finance are more commonly associated with certain types of GAP Insurance.
To understand this in more detail, you may find the following guides helpful:
Important Information
The guides in this section are provided for general information only and are intended to help explain how different car finance agreements work. They do not provide advice on suitability.
You should always review the full terms and conditions of any agreement and, where appropriate, seek independent financial or professional advice before committing.
Reviewed by
Mark Griffiths, Founding Director and GAP Insurance expert
Last reviewed: 12 January 2026
Mark Griffiths, Founding Director and GAP Insurance expert
Last reviewed: 12 January 2026