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About Car Finance
Car finance is a popular way to buy a car as it allows you to spread the cost of a car without needing to pay a lump sum up front. If you look at cars from a dealer, you may see that they offer financing options to help you buy the vehicle of your choice. However, dealers aren’t the only place you can get car finance.
Dealership finance can often come with extra fees and it may not be the best option for you. By comparing deals from other finance providers, you stand a better chance of finding a car finance agreement that is a better fit for your situation.
There are many different financing options including loans, hire purchase and personal contract purchase (PCP). These all work in different ways, and the option that’s best for you will depend on whether you want to own the car, how often you want to change your vehicle, and how much you can afford to pay each month.
How does financing a car work?
When you finance a car, you pay for it in monthly instalments. This means you don’t need to pay a lump sum to buy it, but instead can spread the cost over an agreed period of time, though some car finance providers may also require a deposit.
Terms can range from 12 months to five years, although this will vary between finance types and providers.
The way the agreement works will depend on the type of car finance you choose. If you use a personal loan, then you simply make monthly repayments until you pay off the loan.
Hire purchase works in a similar way, but PCP is more complex as the monthly payments cover the estimated depreciation of the vehicle over the finance term rather than its total cost.
What are the main types of car finance?
There are several types of car finance available that all work in different ways. These include:
Car loans are effectively personal loans that you can use to buy a car. You apply for a loan from a bank or online provider and, if accepted, you can use this loan to buy a car of your choice. Because you will be buying the car outright, you will own the car from the outset.
You will then make the agreed monthly repayments to the lender until you pay off the loan.
Hire purchase (HP)
When you buy a car with hire purchase, you put down a deposit and then take out finance to cover the remaining cost. You repay this amount in monthly instalments and, while you make repayments, the finance provider legally owns the car. At the end of the term, you can pay a small “option to purchase” fee to transfer ownership of the car from the finance provider to you.
Conditional sale is a similar form of finance to hire purchase but, instead of paying an additional charge at the end of the term to own the vehicle, you automatically become the owner after making the final payment.
Personal contract purchase (PCP)
Unlike hire purchase, with PCP you don’t pay off the full value of the car. Instead, your payments cover the estimated depreciation of the vehicle so, in other words, you pay the difference between the car’s value at the time of purchase and what its value is expected to be at the end of the term. Because you don’t pay off the car’s total value, monthly payments tend to be lower than other finance options.
At the end of the term, you can choose to keep or return the car. If you keep the car, you have to pay a final ‘balloon’ payment which is normally a substantial sum. This payment is based on the car’s Guaranteed Minimum Future Value (GMFV), which is approximately the car’s value at the end of the term.
Alternatively, you can choose to return the car to the finance provider at no extra cost.
» MORE: PCP car finance explained
Key features of car finance options
|Personal loan||Hire purchase||PCP|
|Own the car from the start||Yes||No||No|
|Finance secured against the vehicle||No||Yes||Yes|
|Pay a deposit||No||Most cases||Most cases|
|Own the car at the end of the deal||Yes||Yes (if you pay the small final fee)||Only if you pay the final balloon payment|
Can I get car finance?
Whether you’re looking to buy a new or second-hand car from a dealer or private seller, you may be able to apply for car finance.
Providers have their own criteria and some types of car finance, such as PCP, are only available if you buy a car from a dealer, but there are many different finance options to cater for different people.
Your credit score, income and the amount you want to borrow will be some of the factors that will determine whether you can get car finance.
Car finance is available for those with poor credit scores too. There are specialist finance providers that can offer finance to those with poorer credit histories, and there are ways you can improve your chances of approval, such as getting a guarantor or putting down a bigger deposit.
With car finance if you have a bad credit history, it’ll be harder to get a new contract and if you are approved for one it is likely to be expensive.
How to get car finance
If you plan to get a car on finance, it will be useful to have as big a deposit as possible. While there are some no deposit car finance deals, putting down a sizeable deposit means you won’t need to borrow as much.
You will also need to decide which type of car finance meets your requirements, as well as which car you want to buy. You’ll need to make sure that you choose a car and a finance deal that you can afford.
With different providers available, you should do some research and compare them to find the one most suitable for you.
When you’re ready to apply, you’ll need to give the finance provider some personal and financial information including your name, income, and how much you want to borrow. You don’t necessarily need to know the exact car you want to buy when you apply for finance.
Providers will also check your credit score as part of the application process.
What checks are done for car finance?
When you apply for car finance, the provider will conduct a variety of checks. For example, they will need information such as:
- your name, address and date of birth
- your income and employment status
- your credit score
Providers will use these details to determine whether to accept your car finance application and, if they do, what rate of interest to set.
» MORE: Car finance checks
How much does car finance cost?
The cost of car finance will depend on the cost of your car, the size of your deposit, the type of agreement you choose, and the interest rate you qualify for.
Typically, PCP will come with lower monthly repayments as you don’t pay off the total cost of the car. However, if you want to own the car, it can be more expensive in the long term, compared to hire purchase and a personal loan.
A good credit score and a bigger deposit can help you to qualify for more competitive interest rates and reduce the cost of your finance.
How to choose the best car finance for me
To help you choose the right kind of car finance, it’s worth considering:
- What car you want and how much it costs.
- How much you can afford to repay each month.
- Whether you want to own the car from the outset.
- Whether you eventually want to own the car or if you’ll want to change it after a few years.
- How long you want to borrow for, bearing in mind that the longer the term, the more interest you will pay.
- The terms of the finance agreement, such as the mileage restrictions on PCP contracts.
What are the alternative ways to finance a car?
If you have enough money in your savings, you could use cash to buy a car instead of using finance. Because you wouldn’t need to pay interest, using cash could be a cheaper option than finance, but only if you want to own the car for a long period of time.
Cars depreciate in value so, if you prefer to regularly upgrade your vehicle to a brand-new model, taking out a PCP agreement may be more suitable as you can return the car after the agreed term.
» MORE: What is the best way to buy a car?
Car finance FAQs
You can buy brand-new and second-hand cars on finance. However, PCP is likely to come with age restrictions so you can only use it to finance a car that is under a certain age limit. Furthermore, you can only buy cars from a dealership if you want to use PCP, while you can use personal car loans to buy vehicles from private sellers as well as dealerships.
If you buy a car with a personal loan, this is unsecured. If, however, you buy a car using car finance such as hire purchase or PCP, these are secured on the vehicle. The provider is named as the legal owner of the car until you repay the loan in full and, if you miss repayments, the provider could repossess your car.
If you buy a car using hire purchase or PCP, the finance provider is the legal owner of the vehicle. You are the registered keeper of the car until you make all the repayments and ownership transfers to you. If you buy a car with a personal loan, you are the legal owner of the car as soon as you buy it.
You can’t sell a car on finance as you are not the legal owner of the car. You can only sell it once you have paid off the finance in full so, before selling, you will need to contact your finance provider to get the settlement figure you need to pay to clear your debt. If you bought your car with a personal loan, you legally own the vehicle so you can sell it whenever you like.
Like any loan application, applying for car finance will leave a mark on your credit history so other lenders will be able to see that you applied for credit. However, this shouldn’t harm your credit score unless you make lots of applications within a short space of time, or you fail to repay the loan.
Your credit score is one of the factors that finance providers will look at to decide whether to approve your application. You are more likely to get accepted for car finance and get the best interest rates if you have a good credit score. However, you may still be eligible for car finance if you have a bad credit score or a limited credit history, but it will be harder to get a car finance agreement and is likely to be more expensive.
Because you’re not the legal owner of the car while you make hire purchase or PCP repayments, you can’t modify a car on finance without permission from the finance provider.
If you need a car but don’t have the cash to buy one outright, car finance can help to spread the cost. As long as you can afford the repayments, a personal loan, hire purchase or PCP can allow you to drive a car if you can’t afford to pay for it up front. Make sure you research the types of finance and what option would best suit your situation.
Like any kind of loan, car finance will be more difficult to get if you have a poor credit score and/or you’re on a low income. It can also be more difficult if you’re self-employed with a more unpredictable income. However, there are specialist car finance providers that can help people who may struggle to be accepted by standard providers.
Yes, you can part-exchange a car on finance by trading in your old car and using its value towards a new vehicle. The amount your car is worth and the amount of finance you owe will affect whether you can part-exchange and how much you can put towards your new car.
Because car finance is a type of borrowing, it can affect your mortgage. Mortgage providers will take into account any car finance payments when they look at your expenses, and any missed car finance payments will have a negative impact on your credit score. This could affect your eligibility for future credit applications, including for a mortgage.
» MORE: Car finance can affect your mortgage.
Yes, at the end of a hire purchase or PCP agreement, you can hand back your car if you no longer want it. You can also cancel your car finance and give your car back to the provider part-way through your agreement, as long as you meet certain conditions.
Yes, you can cancel your car finance within 14 days of signing your agreement. You can also cancel your car finance later on through voluntary termination. You can do this once you have repaid at least 50% of the total amount repayable.
This will depend on the individual provider and how much you want to borrow. Lenders will assess your income to see whether you could afford the car finance payments so, if you have a temporary job, this could affect your eligibility as your future income isn’t guaranteed.
Dealership finance refers to car dealers that offer car finance for their own customers. Although this can be a convenient way to finance your car purchase, you are limited to the finance that the dealer is offering and dealers may add commission or fees to the total cost.
Sourcing your own car finance independently, from a direct lender or broker, will offer you more choice and could result in a cheaper deal. You are also more likely to find a more flexible car finance option that better meets your requirements, as well as having the freedom to buy any car from any vendor, not just from a specific dealer.
You can buy your car from dealerships and private sellers using car finance. However, if you want to buy a car with PCP, this will only be possible if you buy it from a dealership. Providers may also set their own restrictions on where you can buy your car from.
Yes, if you want to pay off your car finance early, you can ask for a settlement figure from your finance provider. Once you pay this, you will have cleared your finance and be the car’s legal owner. Check if you would face any fees to repay your finance early.
If you can’t afford your car finance payments, you should contact your finance provider as soon as possible. They may be able to give you more time to pay or help you to work out a new payment schedule. You could also approach a debt charity that can offer support and advice. Because car finance is secured on the vehicle, the provider could repossess your car if you fail to repay the loan.
Thanks to the Consumer Rights Act 2015, everyone has some statutory rights when they buy a used car from a dealer. If your car is faulty, you may be able to return it, depending on when you bought it.