How Does Car Finance Work?

The road to the right deal

Used car sales are set to reach around 8 million in 2026, a sign that buyers are prioritising value and choice. With more nearly-new models entering the market from recent fleet registrations, there is fresh stock for households who want predictable monthly costs without paying new-car prices. Finance remains the bridge between budget and better vehicles, and understanding how it works is the difference between a smooth purchase and expensive surprises.

Consumer car finance showed steady momentum last year, with new business edging higher. That is important context after the contraction seen in 2023. Lenders are competing harder for good applications, and that can translate into sharper rates and more flexible terms for the right borrowers. Average car loans sit around £12,681, often over five years for sums above £5,000. What you actually pay depends on income, credit profile and the product type you choose.

Hire Purchase and Personal Contract Purchase still dominate the market because they align with how we use cars. HP focuses on straightforward ownership over time. PCP prioritises lower monthly payments by deferring some value to the end. Meanwhile, used electric vehicles are moving faster, helped by fleet supply, even as tax changes affect affordability from April 2025. For many households, a used EV financed smartly can still cut total running costs.

Regional dynamics matter. Applications are growing fastest outside London, particularly in the North West and North East, where lender competition is strong. If you are considering refinancing in 2026, you are not alone. With tight supply of 3-5 year-old cars, supermarkets and brokers that access multiple lenders can uncover better terms.

Understanding APR is not just about percentages - it is about clarity on total cost over the full term.

Key takeaway: the best deal is rarely the lowest monthly payment. It is the agreement that balances interest, fees, mileage or ownership aims, and your exit strategy.

Next steps

• Check your credit file for errors before applying.

• Set a monthly budget and a maximum total cost figure.

• Compare at least three quotes across HP and PCP.

Who should consider finance now

If you are looking at a used car in 2026, finance can make a higher-spec or younger model achievable while keeping cash for other priorities. Households balancing commuting, school runs and weekend trips often find predictability more valuable than outright ownership from day one. Buyers outside London may see stronger lender appetite and competitive packages as regional applications accelerate.

If you are considering an EV, weigh the rapid growth in used EV availability against new tax charges that started in 2025. For drivers with stable mileage and a clear plan for the next three years, PCP can be compelling. If you prefer to own outright at the end, HP provides a transparent path to ownership without mileage limits.

Your main pathways to pay

1. Hire Purchase (HP) - fixed monthly repayments towards ownership, no mileage limits.

2. Personal Contract Purchase (PCP) - lower monthly payments, optional final balloon to own or return.

3. Personal loan - unsecured bank loan paid to the dealer or seller, you own immediately.

4. Lease (PCH) - long-term rental, no ownership, fixed mileage and return conditions.

5. Car subscription - all-in monthly access with insurance or servicing included on some plans.

6. Refinance - switch existing finance to reduce monthly cost or adjust term.

What it costs and why it matters

Can you apply - and what lenders look for

Eligibility typically hinges on stable income, sensible debt levels and a track record of managing credit. Lenders assess affordability first. That means your monthly car payment plus existing commitments should leave room for living costs without strain. Many successful applications sit around five-year terms for loans above £5,000, although shorter terms will reduce interest paid.

Your credit profile matters, but it is not the whole story. APRs vary widely by income band and risk, with stronger incomes often attracting lower rates. If your file has blemishes, consider a higher deposit or a less expensive car to improve the affordability picture. Used EVs can be attractive, but factor in future taxes and mileage needs.

Kandoo is a UK-based retail finance broker, which means we search a panel of lenders to match your circumstances, not the other way round. That can help if you are outside London or in regions where demand is rising quickly, as competition can work in your favour. Proof of ID, address and income will be required, and additional checks may apply for self-employed applicants.

From enquiry to keys

1. Set your budget and deposit comfortably.

2. Check your credit file and correct errors.

3. Choose car type and expected mileage.

4. Compare HP and PCP quotes side by side.

5. Submit application with ID and income proof.

6. Review lender offer and total payable.

7. Sign documents and fund the purchase.

8. Set up direct debit and track payments.

Weighing it up at a glance

Read this before you sign

Before committing, look beyond the monthly figure. For PCP, model your likely mileage and condition at handback. For HP, check whether a shorter term meaningfully reduces interest without stretching your budget. If you are upgrading from an existing agreement, obtain a settlement figure and calculate the breakeven point after fees. Used EV buyers should weigh lower running costs against battery warranty and any looming tax changes.

Scrutinise fees such as options to purchase, acceptance or documentation charges. Ensure GAP insurance and add-ons are chosen, not bundled. Finally, remember that regional lender appetite differs. If you live in the North West or North East, you may see particularly competitive quotes this year. Take advantage by obtaining multiple offers and comparing total payable to the penny.

Next steps

• Request a written quote showing total amount payable.

• Ask for both HP and PCP versions of the same car.

• Stress-test your budget against a 1-2 percentage point APR rise.

Alternatives worth a look

1. Pay cash and negotiate a stronger vehicle discount.

2. Increase deposit to unlock a better APR band.

3. Consider nearly-new ex-fleet cars with stronger supply.

4. Delay purchase to save and reduce total borrowing.

5. Employer salary sacrifice for eligible low-emission vehicles.

6. Short-term subscription while you watch prices.

Quick answers to common questions

Q: Is now a good time to finance a used car? A: Yes. Used volumes are rising and lender competition is improving. That can mean sharper pricing, especially where regional demand is strongest.

Q: HP or PCP - which is cheaper? A: PCP usually has lower monthly payments because of the deferred balloon. HP can be cheaper overall if you plan to keep the car long term with no mileage caps.

Q: What APR should I expect? A: It varies by credit and income. Average car loans sit around the £12,000 to £13,000 mark with five-year terms common. Stronger profiles tend to secure lower APRs.

Q: Can I refinance an existing deal in 2026? A: Potentially. With intense lender competition, refinancing can reduce monthly costs or shorten the term. Always check settlement fees first.

Q: Are used EVs still a smart buy? A: They can be. Transactions have grown quickly, supply is improving and running costs may be lower. Factor in new tax charges from 2025 when calculating affordability.

Q: Will mileage charges apply to HP? A: No. Mileage limits typically apply to PCP or leases. HP leads to ownership without mileage caps, though condition and maintenance remain your responsibility.

How Kandoo can help

Kandoo is a UK-based retail finance broker. We compare a panel of lenders so you see real options side by side, from HP to PCP and refinancing. Our approach focuses on total cost and suitability, helping you choose confidently. Get a tailored quote in minutes and move forward with clarity.

Important information

This guide is for general information only and not personal advice. Finance is subject to status, affordability and lender criteria. Terms, conditions and fees apply. Always review total amount payable before committing.