Car Finance UK 2026 — PCP, HP, GAP Insurance and Mis-Selling

Car finance is the most common way UK adults finance a vehicle — around 90% of new car purchases are funded through some form of finance. Yet most buyers sign agreements without fully understanding the total cost, their rights, or how the commission structures that underpin dealer finance work.

This hub covers how the main car finance products work, how to assess and compare them, the ongoing FCA mis-selling investigation, and your rights if something goes wrong.

For credit score impact of car finance, see the Credit Scores Hub. For debt problems arising from car finance, see Debt Solutions.

How car finance works in the UK

Car finance allows you to spread the cost of a vehicle over monthly payments rather than paying upfront. The car (or the lender’s interest in it) typically acts as security — meaning the lender can recover the vehicle if you default.

The main car finance products

Personal Contract Purchase (PCP) — how it works

PCP is the most popular form of car finance in the UK. Here’s how a typical agreement works:

1. Deposit — usually 10–20% of the car’s value, though zero-deposit deals exist
2. Monthly payments — calculated on the car’s depreciation plus interest, not its full value. This is why PCP payments are lower than HP for the same car
3. Balloon payment (GMFV) — at the end of the term (typically 2–4 years), the lender sets a Guaranteed Minimum Future Value. You can pay this to own the car, hand the car back, or use any equity as a deposit on the next deal
4. Mileage limits — PCP agreements include annual mileage limits (typically 8,000–15,000 miles). Exceeding these incurs a charge per mile at the end of the term

PCP total cost example

PCP risks to understand

• Negative equity: If the car’s actual market value falls below the GMFV, you may have no equity to roll into a new deal
• Mileage charges: Can add hundreds or thousands to end-of-term costs
• Condition charges: The lender can charge for damage beyond fair wear and tear
• Balloon payment size: The larger the GMFV, the lower your monthly payments — but the bigger the payment if you want to keep the car

Hire Purchase (HP)

HP is simpler: you pay a deposit, then fixed monthly instalments. Once the final payment is made, you own the car. There is no balloon payment and no end-of-term decision. Monthly payments are higher than PCP for the same car because you are paying off the full value rather than just the depreciation.

HP vs PCP — which costs more?

For the same car with the same interest rate, HP costs slightly less overall (no balloon interest) but requires higher monthly payments. HP suits buyers who definitely want to own the car at the end and want a simpler agreement.

The Section 99 voluntary termination right

Under the Consumer Credit Act 1974, you have the right to voluntarily terminate an HP or PCP agreement once you’ve paid 50% or more of the total amount owed. This is a legal right the lender cannot override. If you have paid more than 50%, you hand the car back and owe nothing more (subject to condition). This is a crucial safety net — use it rather than defaulting if you need to exit a finance agreement you cannot maintain.

The FCA car finance mis-selling investigation

What happened

For years, many car dealers and finance brokers operated under discretionary commission arrangements (DCAs). This allowed them to set the interest rate for the customer — and earn higher commission the higher the rate they set. This created a direct conflict of interest: the person arranging your finance had a financial incentive to charge you more.

The FCA banned DCAs in January 2021. In January 2024, the FCA began a wider review into whether undisclosed commissions were properly disclosed. In October 2024, the Supreme Court ruled that lenders were liable for undisclosed commission payments on car loans, including hidden commissions that were not DCAs.

Who may be affected

You may be entitled to compensation if:

• You took out car finance before January 2021
• The dealer or broker received a commission from the lender that was not disclosed to you
• You were not given an adequate opportunity to understand the conflict of interest

Millions of car finance customers are potentially affected. The FCA is establishing a redress scheme — you do not need to use a claims management company to make a claim.

How to make a claim

1. Contact your lender directly — you have the right to ask whether commission was paid on your agreement and how much
2. If the lender rejects your complaint, refer it to the Financial Ombudsman Service (FOS)
3. Do not use claims management companies who take a percentage — the process is free through the FOS

GAP insurance — is it worth buying?

GAP insurance bridges the difference between your car insurer’s payout (market value) and either:

• The original purchase price (Return to Invoice GAP)
• The outstanding finance balance (Finance GAP)
• The cost of an equivalent new car (Vehicle Replacement GAP)

When GAP insurance makes sense

• You are on PCP or HP and have a small deposit — you may owe more than the car is worth in the first two years
• The car is new and depreciates sharply in year one
• You have limited savings and could not absorb a gap between insurer payout and finance balance

When to skip it

• Your deposit was large enough that you are unlikely to be in negative equity
• Your standard car insurance offers agreed value cover
• You are near the end of your finance term

Always buy GAP insurance independently

Dealers often sell GAP insurance at the point of sale for £200–£500. The same or better cover is typically available from specialist GAP providers for £50–£150. There is no obligation to buy from the dealer.

Articles in this hub

• PCP vs HP vs Personal Loan for Car Finance
• Car Finance Mis-Selling Claims UK — How to Claim Compensation
• Car Finance Voluntary Termination — Section 99 Rights

Related hubs

• Credit Scores Hub — how car finance affects your credit file
• Loans and Borrowing Hub — personal loan alternatives to car finance
• Buy Now Pay Later Hub — other consumer credit products