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Car Finance Guide: Everything You Need to Know
Car finance allows you to drive a new car without the upfront cost; learn more about how it could work for you.
What is Car Finance?
Car financing or a car loan is a loan that you take out for the sole purpose of purchasing a car, but in a way that is designed to make the process more affordable.
Although numerous options are available, the most common of these is to put down a deposit and then pay monthly instalments, generally over 3-4 years. Financing a car is a popular route to car ownership and use; a car is a generally big financial commitment if you choose to buy it outright, so financing is a good way to make the process of getting a car more affordable.
If you desire the freedom to drive a variety of cars and the ability to easily upgrade your vehicle, car finance could be a practical solution.
Should I Get Car Finance or Buy a Car Outright?
This is a question many people ask when they’re thinking about getting a new car. The answer really depends on your personal finances. As mentioned above, a car is an expensive thing to buy all in one go and, if you haven’t got the cash you need, financing becomes the better option as it means you can still get a car.
If, however, you do have access to the money to buy a car outright, doing so is a good way to avoid paying interest on your car and, as well as this, you’ll be in the driving seat when it comes to choosing when you want to sell it. Staying in control like this makes buying a car outright attractive to people who can afford to do it.
However, even if you can afford to buy a car outright, you might want to use that money for something else. In the modern world, it’s important to have emergency savings for when you need it, or maybe it would be better used to put a deposit down on a house. In these situations, it would possibly be better to finance your car.
How Does Car Finance Work?
Complete our form
Complete our online form, and we could connect you with one of our finance partners.
We source a provider
If you’re eligible, we will find you a reputable lender, who will provide you with the best deal based on your personal circumstances.
Choose your car
If you receive an offer, you’re good to go. Head to a reputable dealership of your choice and pick up your new car.
Different Types of Car Finance
There are various ways to finance a car, but each method will fall into one of three categories: Hire Purchase (HP), Personal Contract Hire (PCH), or Personal Contract Purchase (PCP). HP involves you paying more each month but it means you own the car at the end of the contract, while PCP means you pay less each month and face a choice of three options at the end of the agreement. PCH, meanwhile, works more like a long-term hire agreement. Each type is explained in more detail below.
PCP Car Finance
Personal Contract Purchase (PCP) car finance is a flexible way of financing a car without buying it outright and unlike a personal loan, you’re not forced to pay off the full value. At the end of your agreed repayment window, there is an option to pay a balloon payment. This is larger than your other previous payments and will cover the remaining value of the car, allowing you to own 100% of it.
If you don’t fancy the balloon payment, you do have two other options. You can opt not to purchase the vehicle and get a new car on PCP finance, or just hand the car back and walk away from PCP car finance altogether.
HP Car Finance
Hire purchase car finance is a way of financing a car without having to buy it outright. Unlike PCP car finance, HP means you own the car at the end of your repayment window without having to pay a large balloon payment. You may however have to pay a fee to do so.
For many drivers, HP could be a good way of getting their hands on cars that would otherwise be out of your price range. Explore more of your options below or, if you already know what kind of finance you want, fill in our online form now.
Personal Contract Hire
If you’re not looking to either buy the car at the end of the contract or change the car before the end of the contract, a PCH offers a type of long-term rental option that may suit you. You lease the car for an agreed-upon period (usually 2-5 years) by making fixed monthly instalments. When the contract expires, you simply return the car.
While every car finance agreement will ultimately fall under one of the three umbrellas explored above, there are still multiple ways of going about financing a car, many of which are explored below:
Part Exchange Car Finance
Part exchange car finance involves utilising your existing vehicle as a form of payment towards your new car, rather than making a cash deposit, your car is effectively sold to the dealership. The value of your current car is then deducted from the cost of your new vehicle, forming the basis for your car finance loan.
This option is most suited to people who want to keep their cash deposit to a minimum while also swapping their current car.
No Deposit Car Finance
When entering into car finance agreements, you usually pay a deposit as a form of collateral. Cash is typically the preferred option for dealerships, but in some cases, they may offer you a no-deposit option.
The key benefit of zero-deposit car finance is that it eliminates the need to provide an upfront cost. Instead, you can get your hands on your new car without parting with any cash, making it a more convenient option for some buyers. After getting your car, you will follow a standard HP or PCP monthly repayment schedule.
Used Car Finance
It’s not just new cars that are available on finance, used car finance sometimes suits people better than other options. Since used cars cost less, you can often pay less per month for your car.
Used car finance works in much the same way as new car finance; the car will either be paid for with an HP or PCP agreement and will often require a deposit unless the agreement is either part exchange or one that doesn’t require a deposit.
Electric Car Finance
The UK Government has ruled that, by 2035, all new cars sold in the UK will be required to be zero emission. This shift to eco-friendly cars has meant that electric car finance has become more attractive, especially with the introduction of government incentives to encourage the switch over to electric vehicles.
Financing for an electric car follows the same principles as any other car finance arrangement. In essence, you secure a loan to buy the vehicle and subsequently make regular monthly payments over an agreed repayment period. These payments encompass both the loan amount and an agreed-upon interest rate.
When it comes to choosing how exactly you wish to finance your car, please remember that eligibility rates are based on standard factors such as your income, credit status, and affordability.
To make things as easy as possible to understand and ensure you know exactly what type of car loan would be right for you, we’ve put the three finance types mentioned side-by-side in a table. This way, you can weigh up the pros and cons of each type of car finance, making the decision process a lot easier.
Car Finance With Poor Credit
Many people want to secure a car finance deal but worry if they’ll be given the option by lenders. Because financing a car involves borrowing money, a bad credit score often harms people’s ability to get car finance. However, it is still possible to get car finance if you have poor credit, and many people do succeed in finding a deal that suits them.
It’s important to assess your circumstances and the cost of financing a car before you proceed with your application, as failing to keep up with the payments on your car can lead to further damage to your credit score.
What Type of Car Finance is Best?
There are many different types of car finance payment plans available, many of which are explored above. While the range of options available can be a lot to navigate, we could find the most suitable car finance for you.
Fundamentally, you need to be led by your own personal circumstances. Do you want to own the car at the end of the deal? Have you got a poor credit history? How much do you ideally want to borrow? What will you typically use the vehicle for? Have you got enough money to make a substantial down payment? The answers to these questions are only really known by you, and they will lead you to the car finance deal that best suits your needs.
How Much Does Car Finance Cost?
If you’re looking to finance a car which, if you’re reading this guide, you probably are, the cost has obviously crossed your mind. So how much does car finance cost? Well, it depends on if you’re talking about the monthly cost or the cost of borrowing money. In both cases, it depends.
The monthly cost will depend on how much you put down, how much you’re borrowing, how long for, and your credit score. While financing a car is completely different to buying a house, it might help to draw parallels. If, for example, you put a large deposit down on a house and stretch the repayments over a long period of time, you pay less each month. The same broad principle applies to car finance. The less you borrow and the longer the repayment term, the smaller the monthly cost will be.
Your results
Total Repayable: £0.00
Total Cost of Credit: £0.00
Monthly Repayment: £0.00
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
Representative Example
Borrowing £6,000 with a £1,000 deposit over 48 months with a representative APR of 21.6%, an annual interest rate of 22.1% (Fixed), the monthly payment would be £152.51, with a total cost of credit of £2,320.44 and a total amount payable of £7,320.44.
Rates from 9.9%: The exact rate you will be offered will be based on your circumstances, subject to status.
Car finance with a monthly repayment of £120.00 could be achieved with one of our car finance credit brokers. £120.00 a month is based on a loan value of £4800 over 5 years with a fair credit score. All finance applications are subject to your individual financial circumstances and the financial provider’s criteria.
Please note: Consumer Experts acts as a credit broker, not a lender.
How Much Does Car Finance Cost?
Consumer Experts is used by thousands of people every month, and our customers use us to make the process of purchasing a new car easier.
Borrow from £4,000 to £25,000 over a term to suit your budget and requirements. Do you have a history of bad or impaired credit? Not a problem. We may still be able to help.
To find out if you qualify, simply click the button on the left, complete our short form, and leave the rest to us.
FAQs
Your Questions Answered
How does car finance work?
There are various ways to finance a car, but each method will fall into one of three categories: Hire Purchase (HP), Personal Contract Hire (PCH), or Personal Contract Purchase (PCP).
HP involves you paying more each month but it means you own the car at the end of the contract, while PCP means you pay less each month and face a choice of three options at the end of the agreement.
PCH, meanwhile works more like a long-term hire agreement. Each type is explained in more detail below.
How much does car finance cost?
The monthly cost will depend on how much you put down, how much you’re borrowing, and how long for.
If, for example, you put a large deposit down and stretch the repayments over a long period, you pay less each month. The less you borrow the longer the repayment term, and the better your credit history, the smaller the monthly cost will be.
Read our car finance calculator for more information.
Can I buy from any dealer?
Absolutely. You are not restricted in any way with regards to which dealership you buy from or where within the UK they are based. Once you have your approval, you are free to shop around.
