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    Car finance frequently asked questions

    In the UK, almost all new cars are bought on finance, and a growing proportion of used cars are, too. Despite this, finance can be daunting and confusing, and you may have questions that have been hard to answer.

    Please note this guide is for informational purposes only. Taking out any form of credit should not be done without due consideration.

    Read on for car finance FAQs, demystifying everything from credit scores, to mortgages, and more, as they relate to buying your car on finance. 

    What are the different types of car finance options?
    Can you pay off car finance early?
    Will car finance affect my credit score?
    Does car finance affect mortgage applications?
    Can car finance be transferred to another person?
    Can I get car finance without proof of address for three years?
    Can I apply for car finance without proof of income?
    Can I get car finance without a deposit?
    Can I get car finance with bad credit?
    Can I apply for car finance without a driving licence?

    Get all the answers you need before you agree to a car finance deal.


    What are the different types of car finance options?

    The most common types of car finance are Hire Purchase (HP) and Personal Contract Purchase (PCP). The fundamental difference between the two is that HP is split into even monthly repayments over the course of the contract, whereas with PCP the monthly repayments are lower and a ‘balloon’ payment is made towards the end of the contract. 

    In both cases, monthly repayments add up to equity in the car, which at a certain point you can sell or part-exchange.

    Another popular product is Personal Contract Hire (PCH). PCH is different in that there is no option to buy and legally own the car at the end of the contract. It is strictly a lease, and therefore not really considered car finance. When we refer to car finance, we mean HP and PCP agreements. If it is PCH information you are looking for, you can find it in our car leasing guide. 

    You can also read more information on ways you can own a car, and specifically PCP finance. 

    Can you pay off car finance early?

    Yes. There are a few ways in which you can pay off or end your car finance early, but you should always consider your options before doing so, just to be sure it’s the right thing for you personally. 

    One way to end your car finance agreement early is what is known as ‘voluntary termination’. To be eligible for voluntary termination, you have to have paid off at least half of the total amount payable in the contract (the price of the car, plus interest and other fees), or pay the difference to reach half the cost. 

    Voluntary termination is a consumer protection to help avoid defaulting on debts to car finance companies. If you invoke these rights to end the contract, you must return the car to the car finance provider. Before you go through these steps, it’s a good idea to value your car and check whether you’ve actually made enough payments to be able to sell your car while the value is higher than the debt. You can track your car’s ongoing valuation over the past two years with Motorway’s new Car Value Tracker.

    The other way to end your car finance contract early is to pay off the outstanding balance. To do this you need a settlement figure from your finance provider, which often comes with an added fee for ending the contract early. If this is an acceptable figure for you then it can be paid off and you become the owner of the vehicle. Be aware that if your car has lost lots of value since you started the contract, you might spend more to end the agreement than the car is worth. To sell or trade in your financed car, you don’t have to pay off the whole contract. Once you have your settlement letter, you can sell your car to a dealer who will clear the finance and pay you any surplus. 

    Most people will need to sell their financed car to be able to pay off the remaining balance and potentially collect some profit on top. If this applies to you, we have all you need to know in our guide on how to sell your car on finance.

    Having the funds to pay off your car finance early is great, but you should always do some research first to be sure it makes sense financially.

    Will car finance affect my credit score?

    Buying a car on finance can impact your credit score – but not necessarily in a bad way. If you’re making your repayments in a timely manner, you build up good credit.

    Like with most financial agreements, the lender will check your credit history as part of your application. Some of these lenders may offer a ‘soft check’ – so you can enter your details and see what sort of agreement you might be eligible for. Most soft checks are not recorded on your credit file, and won’t impact your score or be visible in any future financial product applications you may make.

    However, a full credit check will be necessary for your formal application. This will affect your credit score. Although it’s not a major concern, you should avoid taking out multiple applications if you’re likely to fail, as this record will look risky to lenders and negatively impact your credit score. 

    If you are successful in your application, your credit score may dip slightly to begin with due to the new debt you have taken on. However, from here on, repaying your car finance in a timely way improves your credit score.

    Your credit score is vitally important to your living situation and financial health, so it’s vital that you consider all your options when getting a car and only use finance when you are confident that you are capable of making your repayments.

    Does car finance affect mortgage applications?

    The short answer is yes. Mortgage providers will view car finance as a form of debt and as an overhead coming out of your income, reducing what you can afford to make in monthly repayments.

    Lenders tend to use a debt to income ratio (DTI) to determine what proportion of your income is already spent on debt repayments. Mortgage providers always prioritise minimising their risk, so the more outstanding debt you have, the higher your DTI and thus the more risk the lender will be taking. 

    Furthermore, if you have ever missed payments on your car finance and your credit score has taken a hit, the perceived risk on the part of the lender is exponentially higher. This will leave you with fewer mortgage options, a lower amount you can borrow, and higher interest rates. 

    Car finance could potentially affect future mortgage applications, so it’s recommended to consider your debt to income ratio very carefully.

    Can car finance be transferred to another person?

    No. Car finance can not be transferred to someone else. This is because car finance, like other financial agreements such as mortgages, are tailored to individual credit history, income, and circumstances. Your car finance is an agreement between you and the lender. It’s not in the lender’s interest to transfer to or include a third party.

    If you want to transfer your car finance because you are worried about making your repayments, then speaking to your lender openly and honestly is the way to go. Your financier will cooperate and help you explore the various options available to make your repayments more accessible. 

    Depending on how much finance you have paid off, you also might be able to sell your financed car. And if you wish to end your contract at any point and hand back the car, you can explore voluntary termination. 

    Can I get car finance without proof of address for three years? 

    No. Car finance lenders require three years’ proof of address within the UK. This is another case of lenders being risk-averse.

    However, you are not required to be a homeowner. Proof of address, whether you have been renting, living in shared accommodation, or with family or a partner are all perfectly acceptable. 

    Can I apply for car finance without proof of income?

    Proof of income, alongside other important paperwork like your credit score and proof of address, will be considered as part of your application for car finance and is required in most cases.

    Some lenders will accept applicants without proof of income, however it will usually require a strong credit score or other reliable evidence that you will be able to repay the finance within the contract period. Initial applications can be made with most car finance providers without affecting your credit score, in which case there’s no harm in seeing whether you can be accepted without proof of income.

    Can I get car finance without a deposit?

    Yes. Some lenders will accept car finance applicants without a deposit. However, whether you are accepted ultimately depends on your personal circumstances. 

    The most important thing is your credit score. Lenders do not want to take risks, so proof you have repaid previous debts on time is vital. Your level of income is another important factor the lender considers. Overall, lenders are typically willing to negotiate and find the terms for a deal that suits you.

    Even so, it should be noted that not having a deposit will raise your monthly repayment amount and possibly the length of your contract. Most car finance providers can check your eligibility without affecting your credit score, in which case you can apply without risk. 

    Although car finance without a deposit is available, it raises the monthly repayment amount, so you should always weigh up your options.

    Can I get car finance with bad credit?

    Yes. Some car finance lenders will be willing to accept applicants with a lower credit score, but they will only do so if they can reduce risk in other ways.

    All car finance applications are considered on a case-by-case basis so, although a low credit score can reduce your chances, it does not ruin them entirely. 

    An applicant with a low credit score might pay a higher deposit and higher interest, have longer contracts, and/or experience a more restricted range of car brands and models. Car finance providers consider more than just your credit score, so don’t be disheartened if yours is considered low. 

    The majority of car finance providers can assess applications without damaging your credit score, so you can apply and see if you are eligible. Nonetheless, you should always consider whether taking on debt is the right decision for you first, especially if you’ve had issues with repayments in the past. 

    Can I apply for car finance without a driving licence? 

    Yes, you do not technically need to have a driving licence to be accepted for car finance. However, you will need a form of photo ID. This can be a valid passport or provisional licence in the absence of a full driving licence. 

    Of course, it goes without saying that you will need a full driving licence if you intend to drive the car on your own. 

    Should you sell your car?

    Want to learn more about the best ways to sell your car? Check out more of our guides here, covering everything you need to know about different finance schemes, and what they mean for you as a car owner.

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