How to get the best car finance
To get the best car finance deal, you need to shop around. Do not just go with the offer you’re given by a car dealership. You must meet the repayments, otherwise your vehicle may be repossessed.
If you do not keep up the repayments on your car finance, your vehicle may be repossessed. You could be responsible for covering any shortfall in value, plus any extra fees and interest. Your credit score may also be affected.
What is car finance?
Car finance is a secured loan specifically designed for buying a vehicle. You can use car finance to buy new or used vehicles.
How does financing a car work?
A car finance agreement is normally secured against the vehicle you buy. You do not own the vehicle until the agreement ends.
When you apply for a car loan, the lender runs a credit check. Your credit file will show the lender if you can afford to repay the loan and it will use it to decide the interest rate it charges you.
Always check your credit score before you apply for any kind of loan so you know where you stand and your chances of being approved.
Car dealerships often offer car finance with their vehicles, but they may not have the best rates. Shop around and get quotes from other lenders before signing an agreement to make sure you find the best deal at the right price for you.
You can use car finance for other vehicles, including:
Cars
Motorbikes
Vans
HGVs
Caravans
Motorhomes
What is a car loan?
A car loan works differently to a car finance contract. It is a personal loan you can use to buy a vehicle outright.
With a car loan, you own the vehicle straight away and pay off the loan balance to the lender. The lender has no claim on your car because the loan is unsecured.
The biggest personal loan you can get is usually £25,000, though some lenders may allow up to £50,000. Personal loans tend to last between one and seven years.
What do you need to get a car for finance?
Before you apply for car finance, there are a few things you'll need to know or have on hand. These include:
Proof of identity: To apply for car finance, you will need to be able to prove your identity, usually your driver's licence and passport.
Proof of income: You’ll also need to provide the finance provider with 3 months’ payslips or bank statements, as this will prove to the lender you can afford your monthly payments. If you’re self-employed, lenders will accept bank statements, providing they show sufficient evidence of regular income, or you may need to submit an annual tax return to show your yearly income.
Address history: When you apply for car finance, you will need to provide your address history for the past three years.
Your budget: Before you sign up to a car finance agreement, you should take the time to calculate how much you can afford to spend on your monthly repayments and the length of time you’ll be paying them for.
Type of loan: There's a wide range of Car Finance Options available, so it’s important to compare your options carefully and select the best package to suit your circumstances. This way you can decide which works best for you and you won’t end up paying more than you need to.
Your credit rating: When applying for car finance – or any credit loan for that matter, understanding your Credit Score is key as it can affect your eligibility for a loan.
| Car finance | Car loan |
|---|---|
| Secured loan | Unsecured loan |
| Only own car when loan is paid off | Own car straight away |
| Can buy with a small deposit (10%) | No deposit needed |
What are the costs of car finance?
How much car finance costs depends on a few different things including the type of vehicle you are buying, the size of the deposit you pay, and the type of finance contract you choose.
The main costs are:
The deposit you pay upfront to get your vehicle. You do not always have to pay a deposit but it will reduce your monthly payments
The interest is the cost of borrowing money over the term of your agreement. Most agreements charge interest, but you can sometimes find 0% deals
The fees cover things like damaging the vehicle, exceeding your mileage limit or missing payments. There may be a purchase fee too
What types of car finance are there?
There are several types of car finance to choose from. They all have different pros and cons so take the time to understand how each works before you choose one.
Hire purchase (HP)
With a hire purchase agreement, you put down a deposit to buy a vehicle and gradually pay off the rest. You normally have between 1 and 5 years to pay it off.
For example, you buy a new car for £12,000 with a £2,000 deposit. You can then pay off the remaining £10,000 over the next 5 years.
At the end of the hire purchase agreement you'll have paid off the vehicle.
| Pros | Cons |
|---|---|
| Low interest rates | Higher monthly payments |
| Flexible repayment term | Minimum 10% deposit needed |
| No mileage restrictions | Only own vehicle at the end |
Personal Contract Purchase (PCP)
Personal Contract Purchases, or Personal Contract Plans (PCPs), are often sold by car dealerships with the car. They normally last for between two and four years.
You pay a deposit at the start and then pay monthly instalments for the duration of the term. You may not have fully paid off the vehicle by the end of the term.
At the end of the plan, you can choose to pay a lump sum to buy the vehicle. This is sometimes called a balloon payment.
For example, you buy a new car for £12,000 and pay a £1,000 deposit. Your monthly instalments over three years total £5,000, leaving £6,000 left to pay. You'll have to pay this to clear the debt and own the vehicle outright.
If you decide not to pay the final payment you can return the car. Or, you could exchange it for a new PCP agreement and get a new car from the same dealership.
| Pros | Cons |
|---|---|
| Lower monthly repayments | Mileage limits |
| Small deposit needed | Potentially large payment at the end of the term |
| Flexibility at end of agreement | Only own vehicle at the end |
You can return the car early and cancel your PCP early if you've made at least half of the payments on your agreement. This is called a voluntary termination.
The guaranteed minimum future value is the minimum amount of money your car will be worth at the end of your PCP agreement.
Conditional sale agreements
Conditional sale agreements are very similar to PCPs, except the final payment is compulsory.
You do not have the option to return the vehicle rather than pay off the loan. They are much less common than PCPs but some lenders still offer them.
Personal Contract Hire (PCH)
A PCH is when you rent a vehicle from a car dealership. This means you never fully own the car.
The rental payments cover the depreciating value of the vehicle over time. You'll need to agree on mileage limits with the dealership.
PCH agreements are popular with businesses that offer their employees company cars.
| Pros | Cons |
|---|---|
| Low repayments | Mileage limits |
| Depreciating value does not affect the driver | Must get comprehensive insurance |
| Few maintenance costs | Never own the vehicle |
Logbook loans
Logbook loans are loans that are secured against the value of your car. They are not specifically designed for you to buy a car.
Can I get car finance with bad credit?
It is possible to get car finance with poor credit, however, there will be fewer lenders willing to lend to you, and you'll likely have to pay a higher interest rate than someone with a strong credit record.
What are the alternatives to car finance?
Although car finance is popular, it’s not always the best or cheapest way to buy a vehicle. Some of the best alternatives include:
Cash is usually the cheapest option. It does not require a credit check and means you'll own the vehicle outright straight away. You may be able to get a discount if you pay with cash
A money transfer is where you transfer cash from a credit card into your bank account to buy your car. You have to pay a transfer fee, which is around 4%. You'll have a set number of months to pay off the balance interest-free. If you’re not able to pay the loan off in the interest-free period, you will need to factor in how much you will pay in interest to the total amount when comparing the costs of buying a new vehicle.
Arranged overdrafts allow you to borrow money from your bank account to pay for your vehicle. But interest rates on overdrafts can be expensive so they aren’t always a good option.
Other costs to consider before buying a car with car finance
Remember to factor in other costs of running your vehicle, including:
Car insurance
Road tax
Petrol
Breakdown cover
Parking costs
Be sure you can cover these costs as well as the loan repayments before you buy the car. If it will be too much of a stretch, it might be worth looking for a cheaper car, or relying on public transport instead. Second hand cars can be around 30% cheaper than new cars.
Check out the car costs calculator from the Money Advice Service
How to pay back your car finance
Most car finance agreements are paid back via monthly direct debit until the end of your agreed term.
You'll have to pay a fee if you miss a payment. Your finance agreement should state how much this will be and if there are any charges for late payments.
If you miss several payments, the lender could repossess your vehicle. They'll probably add a default notice to your credit record at the same time. This could harm your chances of getting a loan in the future and it will remain on your credit score for six years.
Vehicle finance FAQs
Will I have to pass a credit check to get car finance?
Yes. When you apply for car finance, the lender will check your credit file.
What happens if my car is written off before the end of the loan?
You'll still have to pay the rest of the finance agreement. This is why it's important to have comprehensive car insurance.
Can I modify my vehicle if I bought it with car finance?
Yes, but you have to ask permission from the finance company. If you used a car loan to buy the vehicle, you can make whatever changes you want.
Can I part-exchange my vehicle?
Yes, you can usually use your current vehicle as a deposit towards your vehicle finance agreement.
Do I need gap insurance?
You do not have to have gap insurance. It protects your finances if you write off your car before the end of your finance agreement, but it can be expensive.
Can I sell my vehicle before the finance agreement ends?
You need permission from the finance company to sell your car if you have a PCP, HP or conditional sale agreement. If you have a car loan, you can sell at any time.
Can I drive my vehicle abroad?
If you have a PCP, PCH, HP or conditional sale agreement you may need to get permission before you travel and pay a small fee.