What is car finance?
Car finance offers a way to buy or hire a car by paying back what you borrow with interest over an agreed term. It allows you to spread the cost of the vehicle and plan your repayments.
Saving up the amount needed to buy a vehicle isn’t possible for most, which is why car finance is so popular.
Types of car finance
Whether you choose a new or used car, there’s a choice of ways you can pay for your vehicle if you’re unable to pay for your car upfront. Although there are differences between them, most finance options will need an initial deposit; then you’ll make monthly payments over an agreed time period.
Here are three different ways you can spread the cost of your car purchase with the pros and cons of each.
Personal contract plans (PCP)
Hire purchase (HP)
How does Hire Purchase work?
With an HP agreement, you hire the vehicle from the finance company during the term and only become the owner when the term ends.
You usually pay:
- a 10% deposit
- the finance amount plus interest
- a small documentation fee and purchase fee
You make regular repayments over a term of up to six years to cover the purchase price (minus your deposit) plus interest, and when the term ends, the car is yours.
Can you end the agreement early?
Yes. If you decide you don’t want to keep the car, you can give the vehicle back at any time. However, you’ll need to pay off 50% of its value (if you haven’t already), even if you return the car before the halfway point.
The car must also be in good condition, or you’ll be charged for any necessary repairs. Here’s more about ending your HP agreement early on the CCPC.i.e. website.
What to consider
Here’s some advantages and disadvantages to weigh up when considering a hire purchase to finance your car.
How do car loans work?
One of the simplest ways to finance your car is to use a personal loan to buy your vehicle. You can apply online or through your bank, building society or credit union.
It’s easier to shop around for the best rate because you’re not tied to a dealership. You use the loan as cash to buy the car.
The most significant difference with a car loan is that you own the car straight away rather than initially hiring it. This allows you to sell the vehicle and pay off the loan early if you wish.
There’s no deposit to pay, and you can borrow the total amount and pay it back over a term of one to seven years with interest.
What to consider
Here’s the main advantages and disadvantages of choosing a personal loan to finance your car:
Can you get loans for electric cars?
Thinking of going electric? Electric and hybrid cars are generally cheaper to tax, run and maintain with grants available for certain makes and models.
Where to get a car finance agreement
It’s common to take out finance through the dealer you buy the car from (if they offer it) or via the finance company they’re associated with, but that’s not your only option.
There are also some online car sales and finance companies that offer a one-stop-shop. Here’s how it might work:
- Pick a car from their network of dealers
- Apply for credit with them
- Once approved, they’ll tell the dealer you have the funds ready to buy the car
If you source a car from elsewhere, you can go direct to a car finance company with the details of the car you want to buy and apply for credit through them.
Some car dealerships offer finance options through multiple financial institutions, which could help you get a better deal.
Details of who is providing the finance are shown in the agreement you sign, and any queries should be directed to them.
How do you apply for car finance?
You can usually apply online, or if it’s through a dealership, the salesperson will complete the application for you at the showroom, and you’ll need to sign to agree to the terms and conditions.
You’ll need to provide information about:
- The vehicle
- The finance and loan term
- Your identity
- Your bank details
- Your employment
- Your income and outgoings
- Your credit history
The information you give, alongside a credit check, will be used to decide whether to approve you and what interest rate you’re offered.
Can you get car finance with bad credit?
Yes, you can do things to increase your chances and options available if you have a poor credit history. Here are some of them:
- Get a free credit report to check everything is accurate. Here’s how to check your credit record, improve your credit score and deal with any mistakes.
- Take steps to improve your credit score, e.g. clear any arrears and make future payments on time.
- Use a specialist car finance broker who can match you to a lender with more relaxed lending criteria and may approve a poor credit history.
- Time your application well. Improve your chances of being approved by showing lenders an extended period with no arrears or missed payments.
Avoid applying for too many car finance agreements as a credit check will be carried out each time. Too many credit checks can damage your credit record further and limit your ability to access credit in the future
How to find the right car finance agreement
There are lots of things to consider before choosing how to finance your car, here are a few of them:
Car finance FAQs
Can you buy a used car on car finance?
Yes, you can, but you’ll need to check it doesn’t exceed the maximum age allowed by the finance provider when you take out the finance.
How quickly will I be approved for car finance?
It usually takes between 15 minutes and 3 hours to find out if you’ve been approved, depending on the dealership, finance company or bank, and how you apply.
This makes it possible to take the car home on the same day in some circumstances.
Will a credit check be carried out?
Yes. You should limit the number of applications you make for car finance, or it could harm your credit score.
If you’re worried about your credit history, you can check your credit record for free.
Can I switch dealers with PCP?
Yes. You’re free to go to a different dealership if you want to switch to a new make of car. They’ll call the finance company to find out what’s owed on the car and then value the car for you.
If it’s worth more than the guaranteed minimum future value, you can roll this credit into your next PCP, but if it’s worth less, you’ll have to decide whether to:
- Pay off the debt and start a fresh PCP
- Return the car and pay what’s owed
- Carry the debt forward into a new PCP
Carrying the debt forward could lead to a bigger debt further down the line that may be unmanageable.
Can I pay my car finance off early?
Yes. This is usually an option and can be a good way of saving on interest, but always check if there are any early repayment charges.
What will my monthly repayments be?
It depends on several factors, for example:
- How much you borrow
- The interest rate
- The loan term
- The type of finance, e.g. HP, PCP, car loan
- Your credit history
Lots of car finance companies have calculators that can help to give you an idea of what your repayments will cost. You can play around with the term to reduce or increase your payments to fit your budget.
Make sure you can comfortably afford the repayments for the full term to avoid getting into arrears and shop around for the best rate.
Is insurance cheaper if you finance your car?
No, the price of your car insurance is not affected by the way you finance your car. However, some car finance companies may require you to take fully comprehensive insurance, which is the most expensive cover.