Buying a car is one of the biggest purchases you’re ever likely to make. Buying a car on finance (or credit) is a great option for those looking to spread the cost out over a period of months and/or years. Terms like personal contract purchase and balloon payment can make car finance seem confusing. My Car Credit is here to break it down for you so you can get the car you want, on a car finance agreement that works for you.

What is car finance?

Car finance is an agreement which allows you to pay for your car in affordable set amounts – rather than paying for the car in one go.

A finance lender pays for the car you want, and you pay them back in monthly instalments. The monthly instalments that you make will depend on how much you want to borrow, the length of the agreement, whether you put down a deposit, your credit score and the type of the agreement.

There are many different types of car finance agreement available, so it’s important to know which one will suit you and your circumstances.

What is Hire Purchase (HP)?

Hire Purchase is one of the most common types of car finance because it is nice and simple – you make monthly repayments to the lender over a set period of time and at the end, you own the car.

Here’s a step-by-step guide:

  • Whilst not obligatory, you have the option of putting down a deposit of around 5 – 10% of the car’s price.
  • The agreement lasts between 24 and 60 months.
  • During this time, you make monthly repayments to the lender and are effectively hiring the car from them.
  • At the end of the agreement, you own the car.

Pros:

  • Good for people who want to buy a car but have flexible disposable income and less than perfect credit score.
  • The repayments are regular and fixed which means you can budget accurately.

Cons:

  • The monthly repayments are normally higher with an HP agreement when compared to other options.
  • The finance lender owns the car until you make your last payment, so you cannot change the car to your own preferences.

What is Personal Contract Purchase (PCP)?

Personal Contract Purchase is a little bit more complicated than other options. You make monthly repayments based on the Guaranteed Future Value (GFV) of the car, which is the amount that the car is estimated to be worth by the end of the agreement. At the end of your agreement, you must pay a final sum (known as a balloon payment) to settle it.

Here’s a step-by-step guide:

  • The car you want is worth £9,000 at the start of your agreement but it will be worth £5,000 at the end of it – this is the Guaranteed Future Value.
  • You make repayments based on the difference between the larger and smaller car values (in this case £4,000) and a mileage limit that you agree with your finance lender.
  • At the end of your agreement (which usually lasts from 2 to 4 years) you pay a balloon payment – the end value of the car (i.e. £5,000).
  • You can settle your balloon payment by giving the car back, putting the money towards another agreement, or paying the amount and owning the car.

Pros:

  • Great for those that want to regularly change the car they drive or like to drive newer models.It has lower repayment fees than other car finance options.
  • Flexibility of options at the end of your agreement.

Cons:

  • It is more expensive to buy the car at the end of your agreement.
  • There is the complication of the balloon payment to settle, for which you’ll need to budget.
  • If you go over your agreed mileage, the financial penalties can be significant.

What is a Guarantor Loan?

A Guarantor Loan is when a third party guarantees to make the repayments on a car finance deal if you are unable to do so. Whilst you have a guarantor in place, you are still expected to be financially responsible for making the agreed repayments.

Pros:

  • Enables those with a less than perfect credit score or those who haven’t yet had time to build a score, to get a car.
  • If you keep on top of your repayments, (which in theory should always be the case) you will be able to improve your credit score as you go.
  • Fixed monthly repayments over a fixed period allows you to budget for this kind of agreement.

Cons:

  • Usually a higher interest rate (APR) than other finance options.
  • The guarantor must fit the lender’s criteria, which normally includes them being a homeowner.
  • If you fail to make the repayments, your guarantor will become liable. If your guarantor fails to make the repayments, you could both be issued with a County Court Judgement (CCJ), which would damage both your credit profiles – affecting both your abilities to obtain credit in the future.

Car Finance with My Car Credit

Buying your own car is one of the biggest (and most exciting) purchases you’ll ever make. If you think you’re ready to start the application process, we’ll be more than happy to help.

We welcome people with credit scores of all levels to apply for finance with us. We operate a soft search policy, which means that your initial application won’t affect your credit score. This allows you to shop around for the best deal for your circumstances, without impacting your credit file.

With over 30 car finance lenders and more than 4500 tried and tested car dealers, we have one of the best networks in the UK to match you with the perfect car. Get started today with our Car Finance Calculator!

Rates from 6.9% APR. Representative APR 13.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed

Good

  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs

Fair

  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit

Poor

  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past

Bad

  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan
£

X monthly repayments of
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score

Representative Example

Borrowing £7,500 at a representative APR of 13.9%, annual interest rate (fixed) 13.85%, 47 monthly payments of £201.38 followed by 1 payment of £211.38 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £2,176.24, total amount payable is £9,676.24.

My Car Credit is a credit broker and not a lender.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!