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Car finance: How to find the best car financing for you

Car finance is an essential part of the car-buying process for many people. According to the Finance and Leasing Association, UK consumers bought nearly 680,000 new cars on finance in 2022 and a whopping 1.5 million used vehicles. 

Whether you’re buying a new or used car, car finance can help you spread the cost of your purchase. With so many different options available, it can be hard to know where to start. In this article, we’ll take a closer look at car finance and offer some tips on how to find the right option for you.

What is car finance?

Car finance covers a variety of options available for you to buy a car if you don’t have enough cash to pay the total amount upfront. Typically, it’s a type of loan specifically designed for the purpose of buying a car, however there are more conventional loans and lease options also available. 

There are several different types of car finance available, including hire purchase, personal contract purchase (PCP), and personal loans. It also includes leasing as an alternative option if you want to simply use a car for an agreed period of time but don’t want to own it outright.

How does car financing work?

With several options available when browsing for cars on finance, it can quickly become confusing to understand the best option for your needs and budget. Once you have decided on the car that’s best for you, there are a few things to consider before moving forward with a finance option:

  1. Which cars on finance option is best for you? Whether you’re looking to spread the cost of a car, change it frequently, or simply want to use a car and never actually own it, there are specific car financing options that will be best suited to your needs. Below, we explain the differences and things to keep an eye out for when considering which option is best for you.
  2. Agree appropriate length and terms of the contract. It’s a smart idea to nail down a budget for your monthly car costs, especially as the cost of the car, your deposit amount, the annual percentage rate (APR) and term of the contract will affect the amount you’ll pay each month. Additionally, some car finance options require you to agree to certain conditions, such as a limit on your annual mileage. Again, the higher you go, the more it will cost you per month.
  3. You will be borrowing money. Like any loan, car financing does carry some risks.  Missing payments can damage your credit score, lead to the repossession of the car and even result in county court judgements.  
  4. What happens when the contract ends? Depending on the option you choose, at the end of the contract you may have repaid the loan in full and bought the car outright. Alternatively, you may have the option to either pay an outstanding sum to purchase the car, or return the car and walk away. If the car still suits your needs but you don’t want to purchase it outright, you can also start a new car finance agreement.

What types of car finance deals are there?

Hire purchase

Hire purchase (HP) is a type of car finance agreement that allows you to buy a car through monthly payments over a fixed term (usually two to five years) with interest. With HP, you pay an initial deposit and then spread the remaining cost of the car over the term of the agreement.

At the end of the HP agreement, you own the car outright, provided you have made all the monthly payments and any final payment that may be required. HP agreements are typically used for buying new or used cars and can be arranged through car dealerships or finance companies.

During the HP term, you are responsible for maintaining the car and keeping it in good condition. You are also responsible for any repair or maintenance costs that arise during the term of the agreement.

HP can be a good option if you want to eventually own the car outright and keep it for a long time. However, it’s important to carefully consider the terms and costs of the agreement, including the interest rate and any fees, and to make sure the monthly payments fit within your budget before entering into an agreement.

Personal contract purchase (PCP)

A personal contract purchase (PCP) is a type of car finance agreement that allows you to use a car for a set period of time (usually two to four years) in exchange for monthly payments. With a PCP, you typically pay a smaller monthly payment than with other types of finance agreements, such as hire purchase (HP), because you are only financing a portion of the car’s value. A PCP agreement can be a little tricky to understand at first, but you can break it down into three parts:

  1. Upfront deposit: Typically around 10 per cent of the car’s value
  2. The monthly payments: This is the trickiest element of the PCP agreement. The monthly payments are calculated by the finance company by predicting how much the car’s value will drop over the term of the agreement (often termed the depreciation of the car). Essentially, your monthly payment only covers the amount of value the car will lose over the course of the agreement (less the deposit).For example, let’s say you want to purchase a car worth £20,000 and choose to take out a three-year PCP agreement with a £2,000 upfront deposit and 0 per cent interest rate to make the maths easier. In this case, the total loan amount is £18,000. This loan amount would then be split into two parts – the monthly payments payable over the three years and the optional balloon payment, which you can pay at the end to purchase the car outright (see point three below).To calculate the monthly payments, the finance company would estimate how much the car will be worth at the end of the three years and deduct the deposit already paid. For example, if your £20,000 car is predicted to be worth £10,000 after three years, the monthly payments will total £8,000 over the three years (or £222.22 per month, to be precise). This will be paid by you in monthly instalments plus interest over the course of the agreement. Note that £8,000 will be subject to interest.
  3. The balloon payment: This is also known as the Guaranteed Minimum Future Value (GMFV) or optional final payment and is agreed when you sign the agreement. Using the example above, at the end of three years, you would have the option to pay the £10,000 the car is worth to own it. You will pay interest on this payment as well.

At the end of the PCP term, you have three options:

  • Return the car: You can simply give the car back  to the finance company with no further commitments, provided the car is in good condition and has not exceeded the agreed mileage limit.
  • Keep the car: You can pay the balloon payment to own the car outright.
  • Trade in for a new car: You can trade in the car and use any equity towards a new PCP agreement, similar to a part exchange.

During the PCP term, you are responsible for keeping the car in good condition and maintaining it according to the manufacturer’s recommendations. You will also need to stay within the agreed mileage limit, or you will be charged for excess mileage.

PCP can be a good option if you want to drive a new car every few years, have lower monthly payments than with HP, and have flexibility at the end of the term. However, it’s important to carefully consider the terms and costs of the PCP, including the interest rate and fees, and to make sure it’s the right option for your individual needs and circumstances.

Personal loans

Personal loans are a type of unsecured loan that can be used for a variety of purposes, including buying a car. With a personal loan, you borrow a set amount of money and then make regular monthly payments to repay the amount borrowed plus interest. 

Unlike hire purchase or PCP, buying a car through a personal loan means you own the car outright as soon as the purchase is made. At the end of the loan period, assuming you have made all the repayments, the lender will deem the loan settled and you will have nothing left to pay. 

While you technically own the car from the outset, it is important to continue to make your loan repayments on time. If you miss several repayments, the lender will mark you “in default”, which will be logged on your credit file and harm your chances of being able to borrow money in the future (including for other big purchases such as a mortgage for a home). 

It’s important to contact your lender well in advance if you think you will fail to make a repayment, as typically they will try to work out a new repayment plan to suit your circumstances. The worst-case scenario to avoid is to keep missing payments without letting your lender know. If this happens, lenders can apply to a court to allow a bailiff to seize your car or other items you own up to the value of the car.

Leasing

Car leasing is a form of long-term rental that allows you to use a vehicle for a set period of time (usually two to five years) in exchange for monthly payments. When you lease a car, you are essentially paying for the use of the vehicle, but you do not own it. Instead, the leasing company retains ownership of the car throughout the lease term.

At the end of the lease term, you can return the car or buy it for a predetermined price. Leasing can be a good option if you want to drive a new car every few years and avoid the responsibilities and risks of ownership. However, leasing may not be the best option if you plan to keep the car for a long time, or if you drive more than the mileage limit set by the leasing company. It’s also worth noting that a lease agreement is difficult to exit early without significant penalties. This means you are locked in for the period to both the car and the payment, unlike other forms of financing, where you can settle the finance and sell the car at any time if you have a change of circumstances.

When you lease a car, you will typically need to make an initial payment, as well as monthly payments throughout the lease term. Technically, a lease is not an interest-bearing agreement, but some leasing companies will include a charge in the monthly payments to cover the investment they have made in buying the car for you to rent. You will also be responsible for maintenance and repair costs, as well as any excess wear and tear on the vehicle. Most leasing companies do offer the option for an add-on maintenance package, meaning they are responsible for maintaining the car, however this does increase your monthly payment. Additionally, most leases come with mileage limits, and you will be charged extra for any miles driven over that limit.

Overall, car leasing can be a good option if you want to drive a new car every few years and avoid the responsibilities of ownership. However, it’s important to carefully consider the costs and terms of the lease, as they can be pricey to exit early if you have a change in circumstances.

How to get cheap car finance

While lenders will be the ones setting the terms of any car finance agreement, there are some steps you can take to lower your monthly repayments. Here are some tips for getting cheaper deals:

  • Opt for a larger deposit: The more money you can put down on a car up front, the less you’ll need to borrow and the lower your monthly repayments will be. A bigger deposit might also trigger a lender to offer you a lower interest rate. If you already have a car, consider using it for a part exchange deal rather than selling it, and add cash on top to boost your down payment.
  • Shop around: Set a realistic expectation for the kind of car you can afford. Research cars that fit your budget and choose the one that matches your wish list but doesn’t break the bank, then look at the deals on offer for that model at several different dealers and choose the best one. 
  • Find the lowest APR: It’s a good idea to look at the interest rates on offer from several lenders, as not all of them will offer the same rates. Bear in mind that a poor credit rating might impact your ability to get a lower APR – we’ll touch on that later.
  • Pay attention to extras and fees: Some finance agreements have “hidden” costs, such as fees for excess mileage or damage to the car, or a penalty for ending the agreement early. Make sure you check any deal you’re considering for these extras and consider whether you can afford to pay them.
  • Choose the right mileage allowance: Some car finance agreements will place an annual limit on how many miles you can drive. This is especially true for financing that is dependent on the value of the car at the end of the term, such as leasing or PCP. Choose a mileage allowance that is realistic for your circumstances – too much allowance will see you paying more than you need to, while too little could mean a large sum of fees at the end of the agreement.
  • Go for a longer agreement: If you’re only concerned with getting lower monthly repayments due to a restrictive budget and aren’t worried about the overall cost, it’s worth considering a longer-term agreement, particularly if you choose HP or a personal loan. You’ll end up paying more in interest (and therefore more overall), but spreading the cost over five years as opposed to three could see you paying less on a monthly basis.

Choosing the best car finance deal

When it comes to choosing the right car finance option for you and your circumstances, there are several factors to consider. These include:

  • Interest rates: Different car finance options will have different interest rates. It’s important to compare rates and choose the most competitive deal.
  • Deposit: Some car finance options will require a deposit up front. You should consider whether you have the funds available to pay a deposit and how much you can afford to pay.
  • Monthly payments: You should consider how much you can afford to pay each month when choosing a car finance option. Make sure you can comfortably afford the monthly payments for the duration of the agreement.
  • Total cost: When comparing car finance options, it’s important to look at the total cost of the agreement. This includes any interest charges and additional fees.
  • Mileage restrictions: Certain car financing options, including PCP and leasing, come with annual mileage restrictions that cover the period of the contract. These are typically anywhere between 6,000 to 30,000 miles. For context, if you drove from London to Reading and back three times a week for a year, this would total approximately 13,000 miles over the year. If you exceed the mileage restrictions, the lender or leasing company will typically charge an excess mileage fee for every additional mile.  This can range from 3p to 30p per mile, which doesn’t seem like much but adds up quickly if you go way beyond your limit. Be sure to choose an agreement that offers a mileage allowance matching your typical usage.
  • Who owns the car? In most of the car financing options we’ve outlined, you do not own the car until you have paid off the total amount of the agreement, including monthly payments and the final balloon payment in the case of PCP. With leasing arrangements, the car is always owned by the lease company. If you purchase a car with your own cash or through a personal loan, you will own the car outright from the moment you complete the sale.

In the below table,  we have simplified the differences between the various car financing options available to you.

Finance type Typical length of agreement Initial deposit required? Interest payment required? Mileage restrictions? Who is responsible for maintenance? Who owns the car?
Cash purchase N/A N/A N/A No You You
Hire purchase (HP) 2-5 years Yes Yes No You Finance company until the final repayment is made; then you own it
Personal contract purchase (PCP) Typically 3 years Yes Yes Yes You Finance company until you opt to make the final balloon payment; then you own it
Personal loan Typically up to 7 years No Yes No You You
Leasing 1-4 years Yes No, but payments will include a charge for the investment by the leasing company Yes You, unless you add a maintenance package to the deal, which you’ll pay more for Finance company

Can I get car financing with bad credit?

It may be possible to get car financing with bad credit, but it can be more challenging than if you have a good credit score. Many lenders consider your credit score and credit history when deciding whether to approve a loan application and what interest rate to offer. If you have bad credit, you may be seen as a higher risk borrower, and as a result, you may be offered a higher interest rate or be required to provide a larger deposit.

Here are a few options to consider if you have bad credit but need car financing:

  1. Improve your credit score: Before applying for car financing, it’s a good idea to check your credit score and see if there are any ways you can improve it. This could include paying off outstanding debts, paying your bills on time, and disputing any errors on your credit report. Be aware that these changes will take some time to be reflected in your score.
  2. Look for specialist lenders: Some lenders specialise in providing car financing to people with bad credit. These lenders may be more willing to consider your application and offer you financing at a higher interest rate or with a larger deposit.
  3. Consider a guarantor loan: A guarantor loan is a type of loan where someone else agrees to be responsible for the repayments if you can’t make them. This could be a family member or friend who has good credit.
  4. Save for a larger deposit: If you can save up for a larger deposit, this can improve your chances of getting approved for car financing with bad credit. A larger deposit can reduce the amount you need to borrow and make you a less risky borrower in the eyes of the lender.

Ultimately, while getting car financing with bad credit can be more challenging, it’s not impossible. By exploring different options and taking steps to improve your credit score, you can increase your chances of getting approved for financing and securing the car you need.

Conclusion

Many people rely on car finance to buy a vehicle, whether it’s a new car or a used one. There are several different car finance options available, each with its own advantages and disadvantages. When choosing a car finance option, it’s important to consider factors such as interest rates, deposits, monthly payments, and total cost. By taking the time to compare options and choose the right one for you, you can get behind the wheel of your dream car and spread the cost over a period of time.

Car finance Q&A

When applying for car finance, you will typically need to provide the following details:

  1. Personal information: This includes your full name, date of birth, and contact information such as your phone number and email address.
  2. Employment and income details: You will need to provide information about your employment status, including your employer’s name and contact details. You will also need to provide details about your income, such as your salary or wages, as well as any other sources of income.
  3. Financial information: This includes details about your current debts, such as credit card balances and loans, as well as any assets you may have, such as savings or property.
  4. Vehicle details: You will need to provide information about the car you are looking to finance, including the make, model, and year of the vehicle.
  5. Insurance details: You may be required to provide proof of insurance coverage for the car you are looking to finance.
  6. References: You may be asked to provide references, such as a previous employer or landlord, who can vouch for your character and financial responsibility.

Keep in mind that the specific details required may vary depending on the lender and the type of car finance you are applying for. Be sure to read the application carefully and provide all the requested information accurately and completely.

Yes, it is possible to repay your car finance deal early. It is legislated that all regulated car finance companies must allow customers to settle agreements either in full or partially. To pay off an agreement early, the first step is to ask your finance provider for a settlement figure, which is the amount you will need to pay to end the agreement and take ownership of the car. A partial settlement allows you to pay off a chunk of the loan as a one-off payment, which reduces the length of the agreement and/or the amount of the monthly payments. Lenders cannot charge fees for early settlement, and customers get a rebate of any interest owed too. Note it is important to make sure that your finance provider is authorised and regulated by the Financial Conduct Authority before agreeing to any finance agreement. You should be able to find their registration number at the bottom of their website, and you can confirm this on the FCA register.

A soft credit search is a type of credit check that does not leave a visible footprint on your credit report and does not affect your credit score. Soft credit searches are often used by lenders, credit card companies, or other financial institutions to check your credit history as part of a preliminary application process.

Soft credit searches typically involve reviewing only a limited amount of information, such as your credit score or your credit report’s summary information. They are also sometimes called ‘soft pulls’ or ‘soft inquiries’ and are distinguished from hard credit searches, which are more detailed and can impact your credit score.

If you miss your car finance repayments, it can have serious consequences on your credit score, your ability to borrow in the future, and your ownership of the car. The specific consequences of missing repayments can vary depending on the type of finance agreement you have and the lender’s policies, but here are some common outcomes:

  1. Late payment fees: Your lender may charge you late payment fees if you miss your repayment deadline. These fees can add up quickly and make it more difficult to catch up on your payments.
  2. Damage to credit score: Missed or late payments will be reported to credit bureaus and will negatively impact your credit score. A poor credit score can make it more difficult to get approved for credit in the future.
  3. Repossession of the car: If you continue to miss payments, your lender may repossess the car or your other assets. 
  4. Legal action: If the lender is unable to recover the outstanding balance through repossession or other means, they may take legal action against you to recover the debt. This can result in a county court judgement against you and may impact your ability to borrow in the future.

If you are struggling to make your car finance repayments, it is important to contact your lender as soon as possible. Many lenders have programmes to help borrowers who are experiencing financial difficulties, such as payment plans or loan modifications. It is always better to communicate with your lender and work out a solution than to ignore the problem and risk damaging your credit score or losing your car.

APR stands for annual percentage rate. It’s a measure of the interest rate you’ll pay on a loan or credit product over the course of one year. The APR includes not only the interest charged on the loan, but also any other fees or charges associated with the loan, such as application fees.

The APR is expressed as a percentage and can be used to compare different loan products with varying interest rates and fees. Generally, a lower APR means you will pay less in interest and fees over the life of the loan.

It is important to note that APR is not the same as the interest rate. While the interest rate only reflects the cost of borrowing the initial loan amount, the APR takes into account all costs associated with the loan. As a result, the APR is typically a higher number than the interest rate.

When considering a loan or credit product, it is important to pay attention to both the interest rate and the APR to fully understand the cost of borrowing. Always read the terms and conditions of the loan agreement carefully, including any fees or charges associated with the loan, to determine the total cost of borrowing.

The length of time it takes to get a car finance deal can vary depending on a number of factors, such as the lender’s application process, the type of car finance deal you are applying for, and the completeness of the information you provide. However, in many cases, you can complete the application process online within a few minutes and get approved for car finance within a few days. 

Most lenders offer a “cooling-off period” – which applies to all regulated finance agreements – which means you can cancel the contract and walk away if you change your mind. The cooling-off period is typically 14 days and begins either the day you sign the agreement or the day you receive a signed copy, and you might not be able to take possession of the car until this period has ended – particularly in a lease agreement, where the leasing company is buying the vehicle from a dealer on your behalf. Your lender should explain whether this period applies before you get to the contract stage.

If your car is still on finance, such as HP or PCP, you can’t sell it until you’ve paid off the agreement in full, as you don’t legally own it yet. Once you’ve paid off your car finance in full, you’ll own your car outright so should be able to sell it if you choose to.

Deciding between hire purchase (HP) and personal contract purchase (PCP) depends on your individual needs and circumstances. In general, if you want to own the car and keep it for a long time, HP may be the best option. If you prefer to change cars every few years and want lower monthly payments, PCP may be the best option. However, it’s important to consider the interest rates and fees associated with both options, as well as any restrictions or penalties for early termination or excess mileage.

Nick Jones

Editor in Chief

Nick Jones is a highly experienced consumer journalist and editor, who has been writing and producing content for print and online media for over 25 years.

He has worked at some of the UK’s leading publishers including Future Publishing, Highbury Entertainment, and Imagine Publishing, with publications as diverse as Homebuilding & Renovating, TechRadar, and Creative Bloq, writing and editing content for audiences whose interests include history, computing, gaming, films, and science. He’s also produced a number of podcasts in the technology, science, gaming, and true crime genres.

Nick has also enjoyed a highly successful career in content marketing, working in a variety of topics such as health, technology, and finance, with market-leading global companies including Cisco, Pfizer, Santander, and Virgin Media.

Now the Editor-in-Chief of the Independent Advisor, Nick is involved in all aspects of the site’s content, where his expertise in finance, technology, and home products informs every article that’s published on-site. He takes a hands-on approach with our VPN content, penning a number of the articles himself, and verifying that everything we publish in this topic is accurate.

Whatever the area of interest he’s worked in, Nick has always been a consumer champion, helping people find the best deals and give them the information they need to make an informed buying decision.