Getting a Car on Finance: 10 Things to Be Aware of
Before applying for car finance there are a number of things you need to know in order to make an informed decision. It’s worth knowing when you can cancel, whether you are obliged to buy the car at the end of the contract, and last but not least, how much you’ll pay each month.
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There are a number of different types of car finance products and with each type comes a raft of jargon and associated terms and conditions.
In this article we’ll give you our best tips to help you choose the right car finance for your financial circumstances.
Here are our top 10 things to be aware of when considering car finance.
1. Make sure you can afford the finance
You might think that this would go without saying, but just because you get accepted for car finance doesn’t mean you should proceed with it. It’s imperative that you are confident that you can afford the monthly repayments before you embark on a finance agreement.
You can do this by creating a budget that includes the cost of the monthly car finance payments. Save a dedicated amount each month and put it aside to make the payments you owe; this way you won’t be dipping into your savings or disposable income and you’ll be in the habit of allocating that cash when the payments start for real.
2. Work out if you can afford to run the car on top of the monthly repayments
As well as paying potentially a couple of hundred pounds per month on the finance plan, when getting a car on finance you will need to factor in the cost of running the car.
Think fuel, parking, servicing fees, car insurance and breakdown cover.
Find out how much various popular models of cars cost to run using our car costs calculator.
3. Understand what happens if you miss payments
Before agreeing to a car finance deal you should look into what is likely to happen if you can’t afford to pay for your car for a month and miss a payment.
The repercussions of missing payments will vary from provider to provider. If you contact your provider you may be able to adjust your monthly payments but, if you fall too far behind with your repayment schedule, your car may be repossessed by the finance company.
4. Be aware whether you can cancel your car finance
It is usually possible to cancel car finance when you have paid 50% or more of the total amount payable under the agreement. This is known as “voluntary termination”.
With a Hire Purchase finance plan you can cancel your contract after you have paid 50% of the total amount payable or more. You should be aware that if you’ve paid more than 50% you won’t get a refund on the extra amount paid.
In terms of a Personal Contract Purchase (PCP) you can also cancel when 50% of your agreed contract is paid; however you should be aware of the balloon payment. Because of the balloon payment (a lump sum paid to own the car at the end of the contract) you won’t have paid 50% of the car’s costs at the halfway point of the contract, because PCP monthly repayments do not add up to the total value of the car.
You might also be able to cancel before the cooling off period has ended – typically 14 days. However, this probably isn’t long enough for you to become aware of any financial issues you’re having.
For more information read our guide on cancelling car finance.
5. Make sure you understand the types of car finance
There are various types of car finance, most of which give you the option of owning the car you’re leasing at the end of the lease term.
Personal Contract Hire (PCH) is the one type of car finance where you don’t have the opportunity to own the car at the end of your contract, each contract usually lasts between 2-4 years.
Personal Contract Purchase (PCP) and Hire Purchase (HP) are very similar. The key difference is with personal contract purchases you’ll pay a smaller monthly amount and make up the difference at the end of the contract with a larger lump sum, called a balloon payment, if you want to own the car.
Many people who finance their car purchase through PCP choose to return the car at the end of the contract, without making this payment.
A conditional sale is very similar to a Hire Purchase, only you are obliged to own the car at the completion of the contract
6. Don’t get confused by jargon
When getting a car on finance, navigating the different types of car finance products can be confusing to newcomers. You’ve probably gathered from this point in this article that there is a fair bit of jargon to get your head around. So let’s clarify a couple of points.
Balloon payment – the balloon payment is a payment you’ll make at the end of a contract, if you want to own the vehicle at the end of the agreement.
Settlement figure – if you want to end your contract early, either to sell the car, own it, move to a new car finance package or to stop driving altogether, you’ll need to pay a settlement figure. This is the outstanding amount you owe the finance company, including the interest that has accrued and any fees they may charge.
GMFV - Guaranteed Minimum Future Value, usually expressed as GMFV, is a term you’ll come across when researching PCP finance plans. This value is set by the finance company at the beginning of your contract, and is the payment you’ll pay to own the car. If you choose to return the car to the lender, you can choose to put the GMFV towards another car.
7. Consider taking out GAP insurance
Guaranteed asset protection, or (GAP) insurance, means you shouldn’t lose out financially when an insurance company offers you less than your vehicle is worth in the event of it being written off or if it is stolen.
Insurers will only compensate you for the current value of your vehicle which, because of depreciation, will normally be less than the outstanding finance remaining on your contract. So, GAP insurance can make up any difference between the insurance payout and the amount that you still owe on your car finance agreement.
8. Do I get insurance with my car finance?
Some finance deals have insurance included. You can also look for all-in finance deals, often known as ‘just add fuel deals’, where car insurance, breakdown cover, tax and servicing can be included.
9. Understand the overall costs
As well as the monthly costs, you will have to pay an initial deposit with PCP and Hire Purchase finance plans. Normally, the larger your deposit, the lower interest rates you will be charged. The annual percentage rate (APR) will allow you to compare the total cost of finance from different lenders.
Depending on the contract you are on, you need to bear in mind any mileage restrictions as if you go over the limit you may have to pay extra charges. Additionally, you could be charged extra fees if you return the vehicle with excessive wear and tear or damage.
10. Remember you can negotiate when buying a car
Surprisingly 64% of those who negotiate get a better price when buying a new car, and this can work on car finance too.
You’ll need to know your target car’s list price, see the prices other local dealers are offering for the same model as a bargaining chip, and be prepared to walk away if you can’t negotiate a price you are happy with.
Find more haggling tips at the Money Advice Service.
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more