Getting new wheels?
A new car often costs tens of thousands of pounds – a big price tag to pay in one go! In an ideal world, you’d save up and pay it in one go. But whether your old car’s been written off or you need more seats for a growing family, the demands of life may mean you need a new set of wheels sooner than you can save for it.
Car finance is one way to spread the cost of a car over several months or years. However, there are risks and costs involved, so it’s important to do your research and compare offers before taking out credit.
What are the different types of car finance?
There are several ways to finance your car with credit. Here are the main ones:
A personal loan could give you enough money to buy a car outright. You’ll then pay the loan back over a set length of time, usually at a fixed interest rate.
One advantage of a personal loan is that it’s unsecured, meaning you don’t have to use an asset (such as your car or house) as security. Security is something the lender can forcibly sell to get their money back if you can’t repay them. An unsecured loan means less risk for you, but more risk for the lender, so you may need a good credit score to get approved.
It’s sometimes easier to get approval or a better rate by applying for a loan that’s secured against your car. However, you may lose the car if you can’t keep up with repayments.
You can see your chances of approval for personal loans when you compare loans with us. It’s free and it won’t affect your credit score. Just remember, we’re a credit broker, not a lender† – that means we don’t provide credit, but we can help you find a deal that fits.
With a car hire purchase agreement, you’ll usually put down a deposit to take the car away. You’ll then make monthly payments towards the cost of the car, but you won’t actually own it (or be able to privately sell it) until the final payment has been paid – along with an extra ‘option to purchase’ fee, usually around £100-£200. This is quite different from buying a car with a personal loan, for example, where you’d buy the car outright at the start of your repayment plan.
What’s more, with a hire purchase agreement your debt is secured against the car – so if you stop making your payments, the company may take the car off you to recover the money you still owe.
Note that if you end a hire purchase agreement early, you may have to pay a penalty fee.
Some cars come with a finance option, whereby you’d put down a deposit and pay the remainder in monthly instalments. You may need a large deposit for this option, and your monthly payments may be quite high. But the upside is that you shouldn’t have to pay any interest on the debt, as long as you stick to the term of the agreement and make all your payments on time and in full.
When you get a car lease, you don’t ever actually own the vehicle, you just make regular payments for using it. How much you’re charged is usually based on the value of the car, how long you’ll use it for, and an agreed mileage allowance.
You may pay less each month than if you were paying off a car bought on credit, but there may be extra costs involved. For example, if the car’s a bit scuffed up at the end of the lease, you may be charged an ‘excessive wear and tear’ fee.
You’ll probably need fully comprehensive car insurance, or any damage to the vehicle will need to be paid for out of your own pocket when you return it. Some companies may insist you also take out gap insurance, which gives them more protection against damage or theft.
Personal Contract Purchase (PCP)
PCP loans are one of the most common forms of new car finance, but they can also be one of the most complex. With PCP, you won’t buy the car outright. Instead, you'll put down a non-refundable deposit towards the vehicle’s price, and borrow the rest. You’ll then make monthly payments to cover interest and the cost of depreciation (i.e. what the car loses in value while you have it).
At the end of the contract, you’ll usually have a few options:
- Buy the car outright – you’ll need to pay the value of the car (usually agreed at the start of your contract) minus your deposit. There may also be an additional fee.
- Trading it in for a replacement with a new PCP contract.
- Returning it – there won’t be anything more to pay, as long as you’ve kept to the terms and the car isn’t damaged.
PCP loans are often used by people who like to change their car regularly. They carry the advantage of being quite flexible, and they usually offer low monthly payments since you’re not paying off the car. However, the interest rates are often higher than other types of loans. You should also read the small print very carefully – in particular, watch out for penalty charges for exceeding the mileage allowance, and for damage to the car while you’re using it.
Note that to get approved for a PCP agreement, you’ll usually need a good credit history, especially for 0% or low APR deals.
0% purchase credit card
Buying your car outright on a 0% purchase credit card could be another option, as many car dealers now accept credit cards.
Generally, you’ll need a good credit score to get a high limit on a purchase card. So this option may be most suitable for people with good credit, or those who’re looking for a relatively cheap car.
A credit card can allow you greater flexibility – you can decide how much to pay off each month, as long as you meet the minimum repayment. And with a 0% purchase card, you won’t pay interest on your purchase for a set period of time.
Just make sure you meet the minimum monthly payments on time and in full, otherwise you may lose the promotional rate. Also, it’s a good idea to pay off the debt before the promotional period ends, to avoid paying interest on the lender’s standard rate.
Will I get accepted for car finance?
A good credit score can boost your chances of getting accepted for car finance, and at the best rates. Lenders work out your credit score based on information from your credit report, plus your application details (e.g. your income) and any data they already hold on you (e.g. if you’re an existing customer).
Your free Experian Credit Score can give you an idea of how car finance companies may see you. You can also use Experian to check your eligibility for personal loans and credit cards when you compare offers with us.
Can I get car finance if I’m a young driver?
If you’re a young driver you might have little to no credit history. This can make it harder for companies to judge your ability to make repayments, meaning you’re less likely to get accepted. Luckily, there are steps you may be able to take to build your credit score. Alternatively, you could consider getting a guarantor loan, which allows someone like a parent or friend to ‘guarantee’ you’ll pay the debt back.
What do I need to know before applying?
- How much do you need to borrow?
- How much can you afford to repay each month?
- What type of rate are you getting? If it’s variable, can you afford a rate rise?
- How long do you want to spend repaying the loan?
- How much are you willing to pay in interest overall?
- Do you want to own the car, and how soon?
- How long before you replace your car again?
- Are you comfortable with a mileage limit? How much mileage will you do?
- Are there additional costs involved, e.g. extra insurance or penalty fees?
Finally, remember that getting a car involves ongoing costs. You’ll need to pay for insurance, road tax, MOTs, fuel, repairs, and more. Before you commit to a car finance agreement, make sure you can afford the monthly payments on top of the costs of running a car – plus all your other financial commitments, which could change over time. Missed repayments can have a serious impact on your credit rating, making it harder for you to get credit again in the future.
How should I manage my car finance repayments?
Once you’ve got a car finance agreement, it’s important to manage your repayments responsibly to protect your finances and your credit score. Here are some top tips to follow:
- Stick to your monthly repayments – making them on time and in full – to avoid extra charges and negative marks on your credit report
- Budget for the month ahead to ensure you have enough to cover your repayment
- Consider setting up a direct debit so you never miss a payment by mistake
- Try not to take out more credit while you’re paying off your car finance loan, as this could put your finances under pressure and lower your score