Car Finance Guide
Car finance is one of the most common forms of credit in the UK — but also one of the most misunderstood. Millions of people take out PCP or HP deals without fully understanding what they're signing. This guide explains the main options, your legal rights, and the ongoing FCA mis-selling scandal that could mean you're owed a refund.
The Four Main Types of Car Finance
You pay a deposit, then low monthly payments, then a large "balloon" payment at the end if you want to keep the car. You can also hand the car back or use equity as a deposit on a new deal. Most popular type in the UK.
You pay a deposit and fixed monthly payments until the car is yours at the end — no balloon payment, no option to return. Higher monthly payments than PCP but you own the car outright at the end.
You borrow money from a bank or lender and buy the car outright. You own the car immediately. Simpler than PCP or HP — just a loan to repay. Often cheaper than dealer finance if you have a good credit score.
You rent the car for a fixed term (usually 2–4 years) and hand it back at the end. You never own it. Monthly payments are low but there's nothing to show for it — and excess mileage charges can be high.
PCP vs HP — Which Is Better?
| PCP | HP | |
|---|---|---|
| Own the car at end? | Only if you pay the balloon | Yes, automatically |
| Monthly payments | Lower | Higher |
| Total cost | Can be higher (balloon adds up) | More predictable |
| Mileage limit | Yes — excess costs extra | No limit |
| Flexibility at end | Keep, return, or trade in | Keep (yours) |
| Risk | Negative equity if car depreciates fast | Lower risk, more straightforward |
Your Right to Exit Early — Voluntary Termination (Section 99)
If you have a PCP or HP agreement regulated by the Consumer Credit Act 1974, you have a legal right to hand the car back and walk away once you've paid 50% of the total amount payable (including the balloon payment on PCP). This is called voluntary termination.
Add up all payments made so far. Has it reached 50% of the "total amount payable" on your agreement? If not, you may need to make a lump sum to reach the threshold before terminating.
Send a letter or email stating you're exercising your right to voluntary termination under Section 99 of the Consumer Credit Act 1974. Do not call — get it in writing.
The lender can charge for damage beyond fair wear and tear. They cannot charge you for normal depreciation or general wear. Document the car's condition before return with photos.
Early Repayment (Section 94)
Under Section 94 of the Consumer Credit Act, you can repay your PCP or HP agreement early and receive a statutory rebate on the interest. Contact your lender for a settlement figure — it must include this rebate. The settlement figure is valid for 28 days.
The FCA Car Finance Mis-Selling Scandal
Before January 2021, many car dealers were paid "discretionary commission" by finance companies — meaning the dealer could set a higher interest rate and earn more commission. Customers weren't told this was happening.
Dealers had an incentive to quote you a higher interest rate than necessary, so they'd earn more commission. This created a conflict of interest — you were likely paying more than you should have.
In late 2024, the Supreme Court ruled that lenders who paid secret or partially secret commissions to car dealers acted unlawfully. This opened the door to mass compensation claims.
If you took out car finance (PCP or HP) through a dealership before January 2021, you may be owed compensation — potentially hundreds or thousands of pounds per vehicle.
The FCA is overseeing a redress scheme. Do not pay a claims company — you can complain to your lender directly for free, and escalate to the Financial Ombudsman if refused.
- Write to the finance company (not the dealership) stating you believe you were charged a discretionary commission without your knowledge.
- If they reject your complaint or don't respond within 8 weeks, escalate to the Financial Ombudsman Service — free, and they handle car finance complaints.
- Check the FCA's latest guidance on timelines — a redress scheme may mean your lender contacts you directly.
GAP Insurance — Is It Worth It?
GAP (Guaranteed Asset Protection) insurance covers the difference between what your insurer pays out if your car is written off and what you still owe on finance — or the car's original price. Dealers often sell GAP at inflated prices at the point of sale.
- You do not have to buy GAP from the dealership
- You can buy GAP independently for significantly less (often 50–70% cheaper)
- The FCA restricted GAP sales at the point of sale in 2024 — dealers must now give you a 2-day cooling-off period before you can buy it
- GAP is most useful on new cars with large balloon payments, or if you've put a small deposit down
Things to Check Before Signing
- Total amount payable — not just monthly payments. This is what the deal actually costs you.
- APR — compare this between lenders, not just monthly payments. A lower monthly payment can hide a much higher APR.
- Mileage allowance — excess charges (typically 3–30p per mile) add up fast on PCP or PCH.
- Condition standard — PCP and PCH agreements define acceptable wear and tear. Read it. Scratches, tyre wear, and interior marks can lead to end-of-contract charges.
- Is the lender FCA-regulated? — check the FCA Register before signing. This protects your Section 75 and Consumer Credit Act rights.