What is car finance?
Cash is always the cheapest way to buy a car, but many people don’t have that luxury. Where you don’t have the cash, you have two options. You can take out an unsecured personal loan. Or you could use car finance.
Car finance is a secured loan, as the loan is secured by the car you're purchasing. So like any secured loan, it means that if you fail to keep up your payments the car finance loan company may be entitled to repossess your vehicle. This is a low risk way for a lender to provide you with the money to purchase the car because they have a valuable asset they can take ownership of if you are unable to repay the loan.
What types of car finance are there?
Hire purchase deals ask you to pay a deposit, around 10% of the price of the car. Then you pay off the rest in fixed monthly repayments over an agreed period of time.
You only own the car once you have made the final payment to the hire purchase car finance company. If you miss repayments they could take back the car. So you are essentially hiring the car, until you have paid for it, and then you own it.
Car dealerships, where you buy your vehicle, can set up hire purchase agreements. But to get the best hire purchase deal you should use car loan comparison tools to shop around. Compare hire purchase car finance deals using our car finance comparison.
The best hire purchase deals are for new cars, not used ones.
What rights do I have with hire purchase deals?
When you buy a car with a hire purchase agreement, there are rules to protect you. For example:
Once you have paid half the price of the vehicle, may be allowed to give the car back with no more payments.
After you have paid a third of the price of the car, it can’t be repossessed by the hire purchase company. It would have to get a court order to take the car from you.
Always check your hire purchase contract for specific terms.
Personal contract purchase
Personal contract purchases, also known as PCP's, are like hire purchase contracts. You’ll need to pay a 10% deposit on the car. But there are some important differences.
You will sign an agreement to pay a fixed monthly amount for the car. This will not total the whole value of the vehicle. You use the car while you're paying. After the contract ends you’ll need to choose what you do next.
You can hand the car back. If you want to keep the car, you can pay what the personal contract purchase finance company decides is its resale value. Or you can use the car’s resale value against the cost of buying a new car.
How does a personal contract purchase work?
To get a personal contract purchase you’ll need to pass a credit check.
The personal contract purchase agreement may limit how many miles you can drive, so if you go over the mileage limit you’ll be charged extra.
At the end of the agreement, you can hand the car back without paying a penny more. If you want to keep the car, you will have to make what is called a “balloon payment” to buy it outright at the end of the agreement. The balloon payment is usually based on the value of the car at the end of the personal contract purchase agreement and is likely to be much higher than the monthly payment.
You could also choose to get a new car by paying off the remaining cost of the old car and give the car dealership a new 10% deposit on a different new car.
What extra charges come with personal contract purchase?
Personal contract purchase agreements can be more expensive than other car finance deals.
Make sure the car you are handing back doesn't have extensive damage or the car dealer may ask you to pay extra charges.
Where you've paid at least half the price of the car/car loan, you may be able to return the car early, without paying an extra fee, which is the difference between how much you have already paid and the price of half the car.
Personal contract hire
A personal contract hire is similar to personal contract purchase. The only difference is that you don't have the option to buy the car at the end of the agreement.
How does a personal hire contract work?
To get a personal hire contract you’ll need to pass a credit check and then pay several months’ repayments upfront.
With a personal contract hire agreement, there may be a limit on how many miles you can drive on an annual basis. If you go over the limit, you’ll be charged a fee. However, you won’t need to pay for servicing or car tax during the length of the agreement.
At the end of the agreement, you can hand the car back without paying a penny more towards its price, unless it's damaged.
How do I find the best car loans?
You’ll need to shop around to find the best car loan finance deals. Use car loan comparison sites like Uswitch to compare the best car finance rates or car loan deals.
Car finance deals or car finance loans are repaid over years. Longer term car finance deals will come with lower monthly repayments, but tend to be more expensive overall. Calculate how much you can afford to repay each month, in order to understand the total approximate costs over the life of the loan when choosing a loan.
The best car finance loan for you may be the one with the cheapest monthly repayments. Make sure you can afford every repayment or your cheap car loan could end up becoming very expensive with extra fees and penalties.
How to apply for car finance loans
You can apply for car finance loans at your car dealership. To apply for car finance you will need certain documents and information. This includes:
Proof of ID
Details of your income
How much will a car loan cost?
Car finance loan companies charge interest on the loan. This is the APR. Look out for this number on car finance loan comparison sites to get the best car loans.
Costs included in the APR are the interest rate you will pay the lender for the car finance loan, and any extra charges. The APR you are offered will determine how much your monthly repayments will be.
However, the APR you're offered depends on a number of factors, such as your credit history, your income and the amount of car finance you’re looking for.
To get the cheapest loan rates and the best car finance deals you will need a good credit history with a sufficient income that assure the lender that you can afford the repayments. This is why it's best to only borrow what you can afford to pay back for the whole term of the loan. It's also a good reminder was to why it's so beneficial to have a good credit history - it can help you for years to come.
What should you consider before getting car finance
Car finance contracts come with terms you must stick to.
For example, if you want to make any physical changes to your car, you’ll need to get it approved from the car finance company. Even though it may make the car more valuable, make sure you check in with them first. You may also have to check with your car insurer before making modifications, as they may alter your insurance policy.
You're also required to pay for any repairs the car needs when you return the car.
You’ll have to pay extra if you go over the agreed mileage limit. Car finance companies charge around 10p a mile for this. It may be cheaper for you to choose a car finance deal with higher mileage limits than go over.
Gap insurance covers the ‘gap’ between how much you have paid for your car and how much an insurance company would pay out if it was stolen or damaged beyond repair.
Car salesmen will try hard to sell you gap insurance. But you're likely to get a better deal on gap insurance from third party providers. Find out more about how gap insurance works.