When you enter a secured finance agreement for a car, the finance company owns the car until you’ve made all your payments. While you’re making payments, you’re the registered keeper. Once the final payment is made together with any fees, the car is all yours.
If you choose an unsecured finance product to purchase your vehicle the finance provider will not own the car or place any restrictions on how it is used.
Here, we’ll explain exactly how car finance works and what it means for owning your car.
Financing a car can put you in the driving seat by spreading the cost over time instead of paying a large lump sum upfront. Essentially, you’re entering a loan agreement specifically to help you buy a car. Instead of paying the full price upfront, you pay in monthly instalments over an agreed period.
During this time, the finance company usually owns the car, and you become the legal owner only after the final payment is made. While you’re paying off the car, you’re known as the registered keeper.
There are different types of car finance for different situations, each with its own pros and cons.
Hire purchase (HP)
Unlike a personal loan where the agreement is not attached to the vehicle and you own the car from the outset, with HP you are effectively hiring the car from the finance provider for the duration of the agreement.
You pay a deposit upfront and then make fixed monthly payments. Once all your payments are made, plus the final option-to-purchase fee, the car is yours.
Hire purchase is straightforward and easy to understand, but the monthly payments can be higher, and you don’t own the car until the final payments are made.
Personal contract purchase (PCP)
You make lower monthly payments because you’re only paying for the car’s depreciation. At the end of the term, you can make a final balloon payment to own the car, return it, or trade it in.
Personal contract purchase offers flexibility but you’ll need to budget for that final payment, and there may be mileage restrictions.
Unlike a personal loan where the lender has no connection to the vehicle you choose, with PCP you are responsible for any excessive wear and tear.
Personal contract hire (PCH)
Also often referred to as leasing, you pay a fixed monthly amount to drive the car for a set period and then return it at the end.
Personal contract hire offers lower monthly payments and no depreciation risk, but you never own the car and there can be penalties for going beyond mileage limits or wear and tear.
Unsecured personal loan (UPL)
Another popular way to buy a car is with a personal car loan. Also known as an unsecured personal loan (UPL), you can get one of these from a bank or online lender.
This type of finance is not secured against the vehicle and once you purchase your car using the finance, it is all yours. To cover the additional risk to the lender the APR will often be higher than other types of finance.
Whichever type you go for, finance agreements can help to make car ownership more affordable by spreading the cost. In many cases, it gives drivers access to better cars than buying outright.
However, it’s important to keep in mind that you’re likely to pay more overall due to interest, and you won’t own the car until all payments are made unless you choose an unsecured personal loan. You may also encounter restrictions within your contract, such as mileage limits. So, be sure to do your research before entering any car finance agreement.
Legal ownership and financial ownership aren’t the same thing. Legal ownership means having the car’s title in your name, which can only happen once you’ve paid off the finance agreement in full. Until then, the finance company holds the title.
As the registered keeper, you have the right to use the car and are responsible for keeping it in tip top condition. You have to pay for insurance, as well as any penalties like parking fines.
However, it’s important to keep in mind that you’re likely to pay more overall due to interest, and you won’t own the car until all payments and fees are made unless you have chosen a personal loan.
Let’s break it down with an example for each type of finance agreement.
Hire purchase: You’re making monthly payments on your car and want to sell it to buy a new one. Since you haven’t paid off the loan, the finance company is still the legal owner. That means you need to settle the remaining balance with them plus any additional fees before you can sell the car.
Personal contract purchase: You’re on a PCP deal and decide to move to another country before the contract ends. However, you can’t take the car with you without the finance company’s permission. If you don’t pay the balloon payment at the end, you’ll need to return the car as the finance company remains the legal owner.
Personal contract hire: You’ve leased a car but you’ve gone over the mileage limit. Since the finance company owns the car, they can charge you extra fees for the additional miles when you return it at the end of the lease.
Unsecured personal loan: You have three years left on your car loan but want to sell your vehicle. As you own the car, you can sell it at any time, and are obliged to make payments until the term ends or you settle early.
As the registered keeper, you have the right to use the car as if it were your own. You can drive it, maintain it, and enjoy it. Depending on your agreement, you may also have the right to pay off the finance early, though there might be fees for doing so. You may have restrictions on mileage or what the car can be used for.
Throughout the finance agreement, you’re also responsible for looking after the car. This means keeping up with regular maintenance, servicing and repairs. You need to keep the car insured and taxed, and stick to any mileage limits in your contract. If you miss payments, the finance company could repossess the car.
Always read your finance agreement carefully and ask questions if something isn’t clear. This way, you’ll always be well-prepared and confident throughout the length of your car finance agreement.
Life can be unpredictable at the best of times, and sometimes you might struggle to keep up with your car finance payments.
If you miss payments, the finance company can take action. Before that happens, you’ll be reminded of the missed payment first. If the situation continues, late fees may be charged or missed payments may be reported to credit agencies, affecting your credit score.
Since the finance company is the legal owner of the car until you’ve paid in full, they have the right to take the car back if you fail to make payments. This can also make it harder to get finance in the future.
To avoid defaulting, set up reminders for your payment due dates or arrange automatic payments from your bank. If you think you’re likely to face financial difficulties, contact your finance company immediately.
At Oodle, our team has received specialist training to support customers who may be experiencing difficulties maintaining their payments.
When your car finance term comes to an end, you have a few choices. You can:
Keep the car
If you’re on a hire purchase (HP) or personal contract purchase (PCP) plan, you can make the final payment and keep the car. With HP, this usually means your last monthly payment, plus a final option-to-purchase fee. With PCP, it’s a larger balloon payment. Once you’ve paid it, you become the legal owner.
Return the car
If you’re on a PCP agreement, you can choose to return the car. If you don’t want to make the final payment or your needs have changed, this will likely be the best option. Just make sure the car is in good condition and within the agreed mileage limits to avoid extra charges. Returning the car is usually the only option on a PCH agreement.
Trade it in
With a PCP deal, you can trade in your car for a new one. The car will be revalued at the end, and any equity can go towards a deposit for a new finance agreement. This is a convenient way to upgrade to a newer model without paying a hefty upfront cost.
Think about your financial situation and your driving needs when deciding what to do at the end of your finance term. If you love your car and you can afford the final payment, why not keep the car? If you want something new or different, returning or trading in the car could be a better choice.
Ready to own your car outright?
Getting to the end of your finance term is a significant milestone. Here’s what you can do to make the transition to full ownership smooth.
Make the final payment
Whether it’s your last monthly payment (plus the small option-to-purchase fee) on a HP agreement or a larger balloon payment on a PCP plan, completing this step makes the car officially yours.
Get the title
Once you’ve made the final payment (and your option-to-purchase fee), the finance company will transfer the title to your name. It may take a few weeks, but soon you’ll have all the documents proving you’re the legal owner.
Top tips for a smooth transition
If you’re coming to the end of a finance agreement, hopefully our tips can help things go as smoothly as possible.
✔ Plan ahead
Make sure you’ve got the funds ready for that final payment as you approach the end of your agreement, especially if it’s a larger balloon payment.
✔ Check your agreement
Take another look at your finance contract for any last steps or fees that come with paying off the car.
✔ Stay in touch
Keep in contact with your finance company to make sure all paperwork has been processed and nothing is left outstanding.
If you are in the market for a personal loan we may be able to help
Got your eye on a new car and curious about your options? Get a car finance quote (representative APR 16.9%) from Oodle today and take that all-important first step towards owning a new car.
