Buying on Finance: What the Dealer Does Not Explain

Dealer finance is profitable for dealers. This is not a criticism: dealers are businesses and finance is a legitimate revenue stream. But it means the person explaining your finance options has an interest in the outcome that is different from yours, and understanding what that means in practice helps you make a decision that is actually in your interest rather than one that feels like it is.

How dealer finance works

When a dealer arranges finance for you, they are acting as a credit broker, not as a lender. They submit your application to one or more lenders, and if you are approved, the lender pays the dealer for the car and you pay the lender monthly. The dealer typically receives a commission from the lender for introducing the business, and in many cases has had some discretion over the interest rate you are offered, with higher rates generating more commission. This practice was restricted by the Financial Conduct Authority's rules on discretionary commission arrangements, which were under review from 2024, but the underlying principle that the dealer has a financial interest in the finance you take remains relevant.

The Alternative is straightforward. You arrange finance through your own bank or a comparison site before you visit the dealer. You walk in knowing your maximum budget and your interest rate. If the dealer offers you finance at a lower rate, take it. If their rate is higher, use yours. The dealer still makes money on the car sale. You make a better-informed decision on the finance.

PCP, HP, and what each one means

Personal Contract Purchase (PCP) is the finance product sold most often by dealers. You make monthly payments for two or three years, and at the end you have three options: hand the car back, pay a final balloon payment to own it outright, or use the equity as a deposit on a new deal. The monthly payments are lower than on a hire purchase (HP) deal for the same car, which makes PCP easier to sell, but the total interest paid over the term is often higher and you do not own the car at any point during the agreement without a significant additional payment.

On a PCP deal, the car's guaranteed future value is set by the lender at the start of the agreement. If the car's actual market value at the end of the agreement is above that figure, you have equity. If the market has moved the other way and the car is worth less than the guaranteed future value, you can simply hand it back with no liability, which sounds like a benefit until you consider that you have been paying for the privilege of using someone else's car and have nothing to show for it.

HP is simpler. You pay monthly instalments over a fixed term and own the car outright when the final payment is made. The interest rate is usually comparable to PCP. The monthly payment is higher because you are paying off the full purchase price rather than just the depreciation plus interest. For a car you intend to keep long-term, HP is usually the better product because you end up owning something.

What to check before signing

Read the total amount payable, not just the monthly payment. The monthly payment is designed to be a number that sounds affordable. The total amount payable is the actual cost of the finance. Subtract the car's cash price from that number: the difference is the total interest and charges you are paying. Compare that figure to what you would pay for the same car through a personal loan from your bank at the current rate.

Check the mileage allowance on a PCP deal. Exceeding the agreed annual mileage triggers a pence-per-mile excess charge at the end of the agreement. If you drive twenty thousand miles a year and the agreement is for ten thousand, the excess charges will be significant. Set the mileage realistically at the start, even if it raises the monthly payment slightly, because excess mileage charges are calculated on a rate that makes any payment uplift look reasonable by comparison.

For the mechanical side of a car purchase, see how to inspect the car before you commit, and the buying section for more on the full purchase process.

Settling early and voluntary termination rights

On both PCP and HP agreements, you have the right to settle the finance early by paying an early settlement figure. This figure is the remaining principal plus any interest accrued to the settlement date, minus any statutory rebate for early repayment. Lenders are required to provide a settlement figure within two working days of request. If interest rates have risen since you took your agreement, refinancing is unlikely to make sense. If rates have fallen, it may be worth comparing a new agreement against the remaining balance.

HP agreements in the UK also carry a voluntary termination right under Section 99 of the Consumer Credit Act 1974. Once you have paid at least half of the total amount payable, you can hand the car back to the finance company and walk away with no further liability, provided the car is in reasonable condition. This right is often not explained at the point of sale. The half-way point is calculated on the total amount payable, not just the principal, so it includes interest. If the finance company claims the car has damage beyond fair wear and tear, they can pursue a charge for that damage, but they cannot pursue the remaining instalments.

Understanding this right does not mean using it is always the right decision. If you have paid sixty percent of the total amount payable and the car is worth more than the remaining settlement figure, you have equity and the settlement route preserves it. The voluntary termination route protects you when the car is worth less than the remaining balance and you cannot continue the payments, which is the situation the legislation was designed to address.