When you’re looking into buying a new car, perhaps the most important thing to consider is how you are going to finance the purchase. Car finance deals are one of the most common ways to buy new cars, but how much can you borrow, and how much will the monthly repayments be?
One of the quickest ways to get those answers is to use a car finance calculator like the one above, simply input how much you want to borrow, how long you want to pay it over and what your credit score is (don’t worry if you don’t know exactly, just a best guess in terms of ‘Excellent’, ‘Good’, ‘Fair’ or ‘Bad’ will do).
Car finance options explained
If you’re not sure where to start in terms of car finance then read our guide below on all of the different options, and how to get the best deal.
When you’re out looking for a new car, just about every car dealer, broker or car supermarket will try to offer you some form of car finance scheme. These are a huge source of profit for the motor trade, and by taking a credit finance package and spreading the cost over a long period of time is often the only way consumers can afford a new car.
There are a lot of different car finance plans and packages out there, with lots of different payments options – all of which have their own advantages as well as disadvantages. We go through the different car finance options below, as well as some alternative options like credit cards, personal loans and other forms of independent borrowing, to help you understand all of your options and get the best deal possible.
Typically, there are three main types of car finance offered by dealerships:
Hire purchase (HP)
This car finance arrangements means consumers pay a deposit (usually 10% of the vehicle’s value) and then pay the remainder of the balance in monthly instalments – plus interest. With a HP deal you do not own the car until you have made the final payment, and you can’t sell it on without the lender’s permissions. If you miss any of your monthly payments then the car can be repossessed, so it’s important to stick to a deal you can afford.
Personal contract purchase (PCP)
A PCP deal usually involves you paying a deposit and then low monthly instalments over a fixed length of time. At the end of this period you can choose to pay a final lump sum (known as a ‘balloon payment’) to buy the car outright, return it to the dealer or sell it on to pay the remainder of the loan. This kind of finance option suits those who want to change their car quite often, and it is based upon what is known as the ‘minimum guaranteed future value’ (MGFV) of the vehicle. As such, it is important that you stick to the mileage limits set out in your finance agreement and keep the car in good condition.
Personal leasing (contract hire)
Similar to a PCP, this option involves low monthly payments but you do not have the option to eventually buy the car outright. It is, however, very easy to change cars. The total cost is determined by the type of car, the length of contract and the agreed upon mileage limitations. Personal leasing usually involves an upfront payment of about three month’s in advance. For these kind of deals you should be looking to get servicing included, and make sure you compare deals and take into account things like the APR, the monthly payment amounts, the total amount that is to repaid and admin fees.
While discussing your finance options, dealers will also usually look to add some extras into your plan. These tend to include:
Gap insurance or ‘asset protection’ – This is designed to cover the financial ‘gap’ between what the current market value of the car is and the outstanding value of the loan/cost of replacing the car if it is stolen or written off.
Minor damage insurance – Any scrapes or superficial/cosmetic damage to the vehicle could affect the guaranteed value of the car when it’s time to return it at the end of your lease period, so this insurance is designed to help cover any shortfall if it has suffered damage. There may also be separate policies for protecting things like the tyres and alloy wheels.
Usually you will find that these products and cover options can be purchased more cheaply if you arrange them yourself rather than through the dealer. The only benefit the dealership offers is the convenience of rolling them all into one car finance plan for you. If you wish to go ahead with the dealer purely for the convenience, then make sure you request a discount as they usually will be in a position to offer one. If not, look online for the best car insurance deal for you.
Rather than utilising a car finance deal, many consumers prefer to pay for a new car outright using cash – which is the more straightforward transaction. If your own savings and personal finances aren’t quite healthy enough for this option then there are some other independent finance options to help you drive off the forecourt in a new car after making a one-off payment to the dealer…
One option is borrowing the amount needed for the car from a bank or other type of lender. You may be hit with a high APR, but you will not have pay a big lump sum upfront as a deposit and you will have the option to spread the loan repayment over a longer period of time. Also, you will own the car straight away after making the payment. It could therefore work out cheaper than car finance in the long run.
As long as you have a big enough credit limit you could buy a car using your credit car just like any other big purchase. Similar to a personal loan though, the downside is the APR and you will have to be disciplined about making your monthly payments. Also, some car dealerships don’t accept credit cards and a lot of them that do will charge extra fees.
Some people choose to borrow more on their existing home mortgage to pay for a new car, which is an attractive option as the interest rates on mortgages can be quite low in comparison. This can also be a lot easier to manage than having separate finance deals in place. The big downside though is that if you miss a payment then your home is at risk, also it can end up being more expensive in the long run as you will be paying the interest off for the life of the mortgage.
How to get the best car finance deal
The good news when it comes to finding the best car finance deal is that it has become a very competitive market for car dealers. They make a lot of profit from finance deals, some estimates even go as far as saying they make more from finance than selling the cars themselves. This means there’s room for negotiation with dealers to get the best price for you – whether that’s a discount on the original amount or getting some extras thrown in for free.
Know the repayment rate – You need to understand the APR (Annual Percentage Rate) as this is the amount of interest you will be repaying over the course of the car finance agreement. Compare this with other car finance providers as well as credit card and personal loan lenders. Make sure when you’re doing this you are taking into account all the different timeframes, lease periods and added fees you may need to make.
Think long term – You may get drawn to a low monthly payment, but do your due diligence and make sure you assess the cost of the finance plan throughout its entire length i.e. what will the total amount repayable be once the APR and initial payments have been factored in?
Shop around – Sometimes different dealers, even for the same brand of car, can offer very different deals depending on where they are based, so it definitely pays to look around and not take the first deal you see.
Haggle – Always negotiate with the dealer, particularly over the APR and the deposit contributions. If you’ve followed these tips then you should be armed with some other finance deals so use these to persuade the dealer to drop the price and/or throw in some extras for you.
Don’t rush into anything – Whatever car finance option you end up choosing, it will be with you for a while – so take your time and don’t get pressured into signing up before you are comfortable with what you are agreeing to.