Car Finance FAQs
Answers to all your car finance questions!
There are now many different ways to purchase a new car, and although it’s nice to have so many options available, there are plenty of questions that need answering before you go ahead and commit to a contract.
Here, we answer the most frequently asked questions from new car buyers in the UK, including a breakdown of each type of car finance contract.
In this article:
Another way is to get a specialist car finance plan. Generally, the main types available are Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Contract Hire (PCH) – the latter is most commonly known as a car leasing contract.
What is HP car finance?
Hire Purchase requires an initial deposit, followed by fixed monthly payments (plus interest) over the course of the contract (depending on the length of the agreed term).
The car finance company owns the vehicle during the contract, but you can take full ownership once you make the final payment.
What is PCP car finance?
Similarly to HP finance, a PCP agreement requires a deposit followed by monthly instalments (plus interest).
The car belongs to the finance company during the contract, and because you’re only paying off the depreciation, there are a few options in terms of what happens at the end of the contract.
Monthly payments tend to be less than other types of finance, but you don’t automatically own the vehicle once your contract ends. When it does end, you have three choices; you can either:
Return the car to the supplier and end the agreement completely
Pay the remaining value of the car (with a ‘balloon payment’) to take full ownership
Exchange the car for a new one and “restart” the contract
What is PCH leasing?
PCH is slightly different to PCP and HP, as you never own the car and there’s no option to keep it.
It’s similar to other forms of finance in terms of paying an initial deposit and monthly payments, but you’re always ‘hiring’ the car rather than owning it if you lease your car with a PCH agreement.
One of its main benefits is that you can expect cheaper monthly payments, but it comes with the sacrifice of not having the option to keep the vehicle.
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Car finance deals usually require a deposit of somewhere between 10% and 20% of its full value.
In most cases, the bigger the amount you can afford to put down as a deposit, the better off you’ll be in the long run.
This is because you will subsequently be borrowing less, and you could even be offered additional benefits – such as a 0% interest rate in some cases.
The cost of getting a car on finance is determined by the type of car you want to purchase and the terms of your contract.
If you decide to opt for a personal loan (car loan), credit card, or specialist car lease agreement to pay for your new vehicle, the amount you can borrow depends on both the agreement you have with your provider and your current financial situation (outgoings, income and credit status).
It also depends on the value of the car, of course.
The maximum amount of money you can borrow depends largely on your credit status, as you’ll need a good or excellent credit rating to be eligible for the best loans.
The more expensive the car is, the more money you’ll need to borrow. Remember, everything you borrow must be paid back (usually with interest!), so stay realistic and don’t opt for the biggest loan you can get, just because you can.
You can check your car finance eligibility using one of many online tools available. You simply provide them with certain details such as how much you need to borrow and how long you’d like to lease the vehicle for.
You’ll then need to provide your personal details, similarly to any other credit checking website. Once you’ve entered all your details and credit requirements, they’ll usually give you an idea of how likely you are to be accepted for certain loans or finance options.
Knowing exactly what checks are done for car finance is difficult because it can vary with each credit provider and type of contract, but you’ll always be subject to a general credit check whenever you apply for any type of loan.
Put down a larger deposit
Get a cheaper car on finance
Secure the debt against the car
Provide the provider with proof of a regular income
Should I be worried about borrowing money to buy a car?
No, more than 80% of new car purchases involve some form of borrowing, whether it’s a specific car finance plan or a personal loan to cover the costs.
Car leasing has become very popular in recent years, thanks to its benefits and the issue of depreciation associated with buying a car.
But be sure that you only agree to a contract that you can afford to pay back comfortably; it’s especially important to think about the long-term implications of the interest rates.
Car finance deals typically last around one to three years, depending on the type of contract taken out and your preferences, but Hire Purchase contracts can last up to five years.
Borrowing for longer usually means you’ll pay lower monthly payments, but it doesn’t necessarily mean that it’ll work out as a cheaper or more cost-effective deal in the long-run (due to interest, etc.).
Loans that last longer may have lower monthly payments, but the amount of interest you pay will add up over time.
For example, if you borrowed £10,000 at 4% interest over three years, monthly payments would be £295 and the interest overall would total £617.
For the equivalent loan lasting five years, only two years longer, monthly payments would drop to £184 and seem a better deal, but the total interest would end up being £1,031.
Be sure to write the numbers down and work out what works best for you, both personally and financially.
You don’t have to get a finance package from the dealer that sells you the car, but you could land yourself a good discount by trying to haggle with them and bring prices down, and you might even get a deal on interest rates.
It’s certainly worth comparing the various ways of paying for your car before agreeing to commit to any provider.
For example, finance deals from car manufacturers themselves sometimes offer 0% interest and even contributions towards your deposit.
There are plenty of deals out there and we can’t stress enough the importance of shopping around and looking for the best deal in terms of its value-for-money.
The first, and most important, figure to compare between car finance quotes is the annual percentage rate – or APR – which is essentially the amount of interest you’ll be paying over the course of a year.
You should also consider the:
Length of the finance package
Total to be paid overall
Extra fees and charges
Length of the borrowing term
Amount you’d need to borrow
Get free car finance quotes from as many providers as possible to compare prices, and don’t be afraid to let them know if you were offered a cheaper deal elsewhere – it doesn’t always reduce the proposed price, but it’s worth a shot!
Subject to the terms of your contract, you are able to cancel your PCP or HP agreement early with voluntary termination.
You have the right, under UK law, to cancel certain types of car finance contracts before they are scheduled to end.
You are able to end PCP and HP agreements early as long as you’ve paid off 50% or more of the total finance amount to the finance company, including any interest and additional fees. Make sure you double check this with your chosen car finance company – there may be fees for early contract termination.
For PCP, this also includes the ‘balloon payment’ we referred to previously, so 50% is not always half-way through the agreement in terms of the timescale.
The car must also be in good condition and free of any serious damage.
If you wish to cancel a car finance agreement before you’ve paid off 50% of the full amount, you may have to pay an extra amount in order to make up the difference.
Can you swap a car on finance?
This depends largely on the flexibility of your agreement and which provider you’re with, so get in touch with them and see what options you have available.
It certainly can be done with some providers though, so don’t hesitate to ask the question.
Who owns the car on finance depends on your contract, but the answer is usually the car finance company rather than the driver.
You are listed as the ‘registered keeper’ of the car, but do not legally own it – until you’ve paid off the full amount, anyway.