What You Need to Know About Car Finance

So you’re thinking of buying a new car, but not quite sure how you’re going to pay for it? With 80% of Britons opting for car finance, there are plenty of reasons why this affordable option has become so popular over the years.

While it’s often tempting to go for the finance deal on offer at the dealership, it’s always best to shop around to get the best deal available that works with your circumstances. 

Whether you choose a personal loan, want to lease or get a hire purchase or personal contract purchase, there are some things you need to know about car finance before signing on the dotted line. Let’s take a look:

Makes buying a car more affordable

While buying a car with cash used to be the number one way to score your next motor, growing living expenses and spending habits have made car financing more popular than ever. What’s more, it allows you to get a more expensive car with the latest safety features and high-end tech without breaking the bank. 

Instead, you can break down the entire cost into low fixed monthly instalments. This allows you to stay in control of your budget and makes your money go further in the long term. 

Read on to find out about the four main financing options available:

Personal Loan

Personal loans are the most popular way to finance a new car. You borrow money typically from a bank or building society to fund your purchase, buy the car, and then it’s yours. After, you pay back your loan with interest on top of the lender over a time period that suits you. 

One thing to bear in mind is that interest can vary from lender to lender, and the duration of your loan, your credit score and personal circumstances can all make a difference. 

This type of car finance is perfect for drivers who are in it for the long haul and would prefer not to change their cars too often. 

Personal Contract Purchase (PCP)

PCP is incredibly straightforward. You pay a deposit (typically 10%) and then make your low fixed monthly repayments. 

No collateral is involved, as the loan is taken out against the vehicle itself, and your payments cover depreciation:

• PCP takes into account the projected value of the car by the end of your term – guaranteed minimum future value (GMFV) or residual value (RV)
• You can pay a “balloon payment” towards the end of your contract – equal to the GMFV. The car will be yours outright once the final payment is made
• You can exchange the car and use the equity for a downpayment on a new vehicle 
• Return the car to the supplier

Bear in mind; you will need to stick to agreed mileage limits and keep the car in good condition to avoid penalties. 

Hire Purchase (HP) 

Like PCP, a hire purchase loan is secured against the vehicle itself, and you do not own the car until your final payment has been made. 

Typically, you pay a 10% deposit and then repay the balance in instalments, plus interest throughout your contract. At the end of the loan period, the car is yours outright. 

Other points to note:

• You can’t sell the vehicle without the lender’s permission
• You can return the car
• Servicing is often included
• The vehicle can be repossessed if you fail to make a payment

Personal Leasing

Perfect for those who want low monthly payments but don’t want to own the car, personal leasing is super convenient, and it’s easy to change your vehicle. 

The leasing cost is based on several factors, including the type of car, length of contract and agreed mileage limits. You can also expect:

• Three months upfront rental in advance 
• Servicing is typically included, but a further large deposit may be required
• Mileage limits might apply

Before considering a personal lease, make sure you compare deals and look specifically at the APR and what you would be expected to pay each month. On the plus side, there may be a further option to buy!

Car finance is available despite your credit score

If you have struggled to be accepted for a loan in the past, have never had finance before or have a “bad credit” history, it’s still possible for you to get car finance. 

Yes, you’re less likely to get the best deals on the market. Yes, your average lender will probably still reject you until you’ve rebuilt your score. But, there are bad credit car finance specialists out there who focus on your individual circumstances to help you get behind the wheel of your dream car. 

At the end of the day, lenders need the assurance that you will make your payments on time, and it’s likely that your poor credit score is due to one failed payment or that you are self-employed. But don’t write yourself off. 

0% finance deals

0% finance deals are very tempting to the casual observer. Your monthly repayments have no interest attached, and you can score yourself a real bargain on the showroom floor. 

Here’s the catch. You will have to pay a large deposit (usually 35%), and you’ll struggle to negotiate any further discounts. Miss a payment, and you could be automatically switched to a higher interest rate scheme, making your investment less worthwhile. 

Don’t get caught out by unnecessary add-ons

You might have found the best finance deal online or walked down to your local dealership and been blown away by what’s on offer. That’s all well and good, but something, dealers will try and push you to make some unnecessary purchased on top of the motor you’ve just bought. 

But don’t get caught up in all the hype. 

Things like gap insurance or “asset protection” may seem a good idea at the time, but in reality, you are paying for the difference between the current market value of your car and the value of your outstanding loan. 

Then there are other packages such as bundles, minor damage insurance and allow wheel and tyre cover that you will definitely find cheaper elsewhere. 

Car finance is the most affordable way to buy a car. It takes away the pressure of coming up with the cash and allows you to make lower manageable monthly instalments. What type of car finance caught your eye?