How to get the best car finance

To get the best car finance, you need to shop around. Do not just go with the offer from the car dealership. You must meet the repayments, otherwise your vehicle may be repossessed.

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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, 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.

Always check your credit score before you apply for any kind of loan.

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.

You can use car finance for other vehicles, including:

    What is a car loan?

    A car loan 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 1 and 7 years.

    What do you need to get a car on finance?

    Before you apply for car finance, there are a few things you'll need to know or have on hand. These include:

      What's the difference between car finance and a car loan?

      Car finance and car loans are different products. The differences include:

      Updated 7 December 2020
      Car financeCar loan
      Secured loanUnsecured loan
      Only own car when loan is paid offOwn 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 the type of vehicle finance you choose.

      The main costs are:

        Check the costs of vehicle finance agreements and loans here

        What types of car finance are there?

        There are several types of car finance to choose from. They all have different pros and cons:

        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.

        Updated 13 March 2020
        ProsCons
        Low interest ratesHigher monthly payments
        Flexible repayment termMinimum 10% deposit needed
        No mileage restrictionsOnly 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 2 and 4 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 3 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.

        Updated 13 March 2020
        ProsCons
        Lower monthly repaymentsMileage limits
        Small deposit neededPotentially large payment at the end of the term
        Flexibility at end of agreementOnly 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.

        Updated 13 March 2020
        ProsCons
        Low repaymentsMileage limits
        Depreciating value does not affect the driverMust get comprehensive insurance
        Few maintenance costsNever 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?

        Car finance is not always the best way to buy a vehicle. Alternatives include:

          Other costs to consider before buying a car with car finance

          Remember to factor in other costs of running your vehicle, including:

            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. 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

            You'll most likely pay by 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.

            If you miss several payments, the lender could repossess your vehicle. They'll probably add a default notice to your credit record. This could harm your chances of getting a loan in the future.

            Learn what happens if you cannot repay your debts?

            Vehicle finance FAQs

            Yes. When you apply for car finance, the lender will check your credit file.

            You'll still have to pay the rest of the finance agreement. This is why it's important to have comprehensive car insurance.

            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.

            Yes, you can usually use your current vehicle as a deposit towards your vehicle finance agreement.

            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.

            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.

            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.

            Find the finance you need to purchase a car