A Complete Guide to Car Finance
More and more people are looking to car finance when it comes to picking out a fresh new set of wheels, but with so many options available to car buyers today, it is crucial that you understand exactly what you’re signing yourself up for.
Borrowing money to buy a car
Unless you’ve found yourself in a fortunate position financially, you may not be able to afford to pay up-front for a new car. Luckily, there are a couple of routes you can take when buying a car on finance.
Specialist plans (PCP, hire purchase and personal car leasing)
Most car dealers offer you the opportunity to take out a PCP (personal contract purchase), HP (hire purchase), PCH (personal contract hire/personal car leasing) or a BCH (business contract hire/business leasing) plan.
These options allow you to pay set monthly fees for a set amount of time, however each type of finance plan has its own pros and cons, all of which are described in greater detail later in this guide.
Read more: The best car finance companies in the UK
General borrowing (credit cards and loans)
If you have a good credit score, you might find it cheaper to use a more general method of borrowing when purchasing a car, such as getting a loan or credit card to pay off the car.
If you want to buy the car outright, you could potentially get a loan or low-interest credit card to cover your initial costs.
Tip: Car dealerships are not the only place you can go to get finance on your new car. All dealers work with specialist lenders who deal with their finance plans, meaning it is likely that you could get a similar plan from another bank or lender – shop around to see if you can get a better deal elsewhere.
PCP (personal contract purchase) – what is PCP finance?
A PCP (personal contract purchase) plan allows you to make monthly payments towards the cost of the vehicle, however you will not own the car during the contract. The only way you can take full ownership is by paying a ‘balloon payment’ at the end of your contract.
With a PCP plan, you pay monthly payments that cover the depreciation value of the car, plus any interest charged on your loan. Your contract will also come with an optional final payment, which gives you the option to make one, final ‘balloon payment’ to keep your car when your PCP deal ends.
You also have the choice of handing the car back or trading it in to start a new contract with a different car, but you might be charged extra if you return the car in poor condition or exceed the mileage cap which was agreed when you first took out your PCP car finance contract.
When taking out PCP finance, we recommend taking out GAP (guaranteed asset protection) insurance. GAP insurance ensures that you will not be out of pocket if your car is written off. Find out more about GAP insurance here.
The Pros and cons of PCP
- Low, monthly payments (usually fixed)
- Option to purchase at the end of your deal, or walk away
- You can regularly change your car
- Charges for exceeding mileage limit
- Charges for returning the car in poor condition
- You don’t own the car without paying the optional ‘balloon payment’
Hire Purchase - What is a Hire Purchase agreement?
Hire purchase draws similarities to PCP as you are required to make monthly payments over a set period of time – the main difference is that you get to keep the car at the end of your contract.
As your payments are covering the cost of the entire value of the car and not just depreciation, they are usually significantly higher than those made with a PCP car finance plan. The shorter your hire purchase deal, and the lower your initial deposit, the more expensive your monthly payments will be.
If you fall behind on your monthly payments then the hire company would be within their rights to take the car back without reimbursement of your previous payments.
Before considering a hire purchase deal, consider the other lending options available as they might be available with a lower interest rate.
The pros and cons of hire purchase
- The cost of the car is spread over several years
- You can keep the car at the end of your deal
- It usually requires a low deposit (10% of car’s value)
- The loan is secured against the car, meaning it can be taken away if you fail to keep up with your payments
- Monthly payments are higher than those who have a PCP or personal car leasing deal
- Can be an expensive option for a short-term agreement
Personal car hire (PCH) – what is personal car leasing?
With a personal car lease (PCH), you will be asked to pay an initial deposit – also known as initial rental payment, which you don’t get back - followed by fixed monthly payments throughout your contract term – this could be for a few months on a short-term contract or on a longer contract for 3 years.
You can have a maintenance package included in the deal for a small extra cost, and this covers you for any potential future problems with the car - it can save you a lot of money in the long-run!
It’s important to remember that you could incur extra costs if you exceed your agreed mileage limit or ruin the vehicle, so be sure you set the right mileage when applying for the deal first, and look after it! General wear and tear is to be expected, but any damage outside of the ‘fair wear and tear’ guidelines will incur fees.
You do not keep the car at the end of the contract, and you can easily change your car and start a new contract afterwards.
The pros and cons of personal car leasing (PCH)
- It makes getting a brand new car more affordable
- Low, fixed monthly payments
- Access to a new car every few months or years
- You don’t need to worry about the depreciation that comes with buying outright
- The deposit can be high (usually 3 months’ rental fees)
- You don’t own the car
- No option to buy the car
- Mileage restrictions
Looking for some amazing leasing deals in the UK? Check out Complete Leasing Ltd here - they also offer deals with no deposit!
Tip: Insurance isn’t included in a leasing deal, so be sure to sort that out separately – you can get a free car insurance quote here with Bobatoo!
Personal loans and credit cards
If you have a good credit score, your best and cheapest option might be to take out an unsecured loan to cover the entire cost of your car. These loans could last for longer than those offered by car dealerships, meaning your monthly repayments are lower.
However, be warned! Depending on how much money you borrow, you might have to pay a high interest rate.
Be warned that if you are no longer able to keep up your monthly repayments, you cannot simply hand the car back as you will have purchased it outright using a personal loan.
Read more: How to improve your credit score
The pros and cons of buying a car with a personal loan
- You own the car immediately
- You could repay it over an extended repayment period
- No up-front lump sum
- Required credit checks could affect your credit rating/score
- Interest rates could be high
Many people ask: can you buy a car with a credit card? The answer is yes – but only if your credit limit allows it. Unfortunately, you are still likely to be struck with high interest rates, so you should only really be considered if you can repay your debt over a short period of time.
Your best option might be to take out a new, long-term 0% interest credit card, which will allow you to borrow money free of charge for an extended period of time. You could also consider paying to transfer your balance to a new 0% interest credit card once this period is up, further extending your 0% interest period.
Some dealerships will refuse to take payments on a credit card and the ones that do allow it are likely to charge an extra fee.
If you know that you do not have a good credit score but still wish to finance a car, read some tips on getting a good deal on a new car with a bad credit rating.
The pros and cons of buying a car with a credit card
- Receive protection from your credit card provider
- Get extended 0% interest rates with selected lenders
- Own the car straight away
- You might not have an adequate credit limit
- You may not be eligible for a 0% or low interest credit card
- Lack of discipline could see you incur large costs
How to get a car loan
Before thinking about buying a car on finance, there are a number of steps you should take to make sure you are getting the best possible deal:
1. Improve your credit score
Improving your credit score will not only improve your chances of being accepted for finance, it will also give you access to higher credit limits and better interest rates.
Bobatoo has put together a list of ways to improve your credit rating in the UK, while you can also read more about the benefits of having a good credit score.
If you’re unsure what your credit score is, you can get a free, detailed insight into your credit rating and score with Checkmyfile here.
2. Know how much you can borrow
Before you start shopping around for cars, you should be shopping around for finance! This way, you’ll have a rough idea of how much money you’ll be able to borrow and won’t waste time looking at cars that are out of your price range.
Many lenders will allow you to apply for a ‘pre-approval’, which comes with a soft check of your credit history and will not affect your credit score unless you go ahead with the loan. If you are unable to get a pre-approval from your lender, consider using Experian’s eligibility checker to see how much you’ll be able to borrow.
3. Get the best car finance deal
Whether you take out a Hire Purchase agreement directly from a dealer or a personal loan from your high-street bank, it is important that you get the best car finance deal possible.
If time is on your side, it is worth spending a while shopping around your various options before making a final decision. You may be able to apply for a low-interest credit card or get an exclusive rate on a personal loan from your bank, but these usually aren’t as quick as taking out finance directly with a car dealership.
You’ll want to watch out for the APR charged by each lender and, ideally, opt for the one with the lowest rate – remember, having a better credit score will work in your favour when looking to take out finance.
Cheap car insurance with Bobatoo
Whether you get your new car on finance or not, you will still need car insurance – and you can get it right here with Bobatoo.
Bobatoo works with some of the UK’s top insurance providers to ensure customers the best possible deal on car insurance at the best possible price.
To get your free, non-obligatory quote on car insurance, tap the green button below.