Car Finance Explained: Your Car Finance Options
Taking the mystery out of your car buying journey.
Part of Evolution Funding, the UK’s largest motor finance and technology provider.
Part of Evolution Funding, the UK’s largest motor finance and technology provider.
Buying a new car is an exciting experience. It's also one of the biggest purchases you'll make. It's important to understand all of your options, especially when it comes to the question of how you'll pay for your car.
If you’re thinking of using finance to buy a car, you may be feeling confused by all the finance options available. With so many products on the market and lots of confusing jargon, taking out a car loan can become a minefield.
Our ‘Car Finance Explained’ guide is designed to take the mystery out of all the different car finance options, so that you can focus on enjoying your car buying journey!
How does financing a car work?
For most people, buying a car outright isn’t possible. For this reason, more and more people are opting to finance the car of their dreams.
Car finance allows you to drive a car without having to pay a large lump sum payment upfront for the car. You make affordable monthly payments directly to the lender. The lender owns the car until you have paid the borrowed amount (plus interest and any charges) in full. This is done through monthly instalments as well as balloon payments (more on this later). Whilst you are paying for the car, you have full use of it – as though it is yours.
The monthly payments, the interest rate, the terms of the agreement, and your options at the end of the agreement, will all vary depending on which finance option you go for. Below we go into more detail about your different car finance options to help you find the best deal for new cars.
What are my car finance options?
It is important that you understand the difference between your finance options for a car. Not all finance packages are suitable for everyone, and your circumstances may dictate the best option for you. Below we run through the pros and cons for each type of finance – from a hire purchase agreement to secured loans.
How does Hire Purchase work?
A Hire Purchase agreement, or HP, is considered the simplest type of car finance deal – which is why it’s so popular. It allows you to spread the cost of the car, plus interest, across a set period of time. With a Hire Purchase agreement, an initial deposit is not always necessary.
However, it is worth bearing in mind that deposit contributions will bring down the balance, limiting the amount of interest incurred for lower monthly payments. Many people trade in their old car to provide a deposit for new car hire purchase.
The lender simply takes the price of the car (minus any deposit) and adds interest. The final hire purchase figure is then divided over the term agreed, usually between two and five years.
The payments never change throughout the HP agreement, allowing you to budget for your outgoings. There is no large balloon payment at the end, although there is usually admin and transfer of rights fees to pay. Once you’ve paid the Hire Purchase agreement off in full, you own the car outright.
Hire Purchase pros and cons
Pros:
- Fixed interest rates for a HP agreement
- Fixed monthly payments help with budgeting
- No large payment at the end
- You own the vehicle at the end of the agreement
- Good for people with less than perfect credit score
- No mileage limits
- No fines for excess wear and tear
- Option to pay off your agreement early
- Finance secured against the car, not your home
- You have the right to Voluntary Termination (VT)
Cons:
- You don't own the car until you've paid in full
- Hire purchase agreements are more expensive than a personal loans
- Higher payments than a PCP agreement
What is Conditional Sale?
Conditional Sale is similar to Hire Purchase, except that you pay higher payments and don’t have a fee at the end. As soon as you’ve made the final payment, the vehicle becomes yours.
Conditional Sale pros and cons
Pros:
- Perfect if you're sure you want to keep the car afterwards
- Allows for a longer repayment term (2-6 years)
- Nothing to pay at the end to own the car
Cons:
- You don't own the car until you've paid in full
- You'll need to pay a deposit, usually 10% of the car's value
What is Personal Contract Purchase (PCP)?
Personal Contract Purchase (PCP) finance has gained popularity because all the payments each month are lower compared to hire purchase, allowing you to buy a car that’s newer or with higher spec. However, this type of agreement is also a little more complicated than Hire Purchase (HP).
With a personal contract purchase agreement, your fixed monthly repayments are lower because a significant proportion of the borrowing is deferred to an ‘optional final payment’ at the end of the agreement. This payment is often called a ‘balloon payment’, which is a final lump sum payment allowing you to own the vehicle outright.
You’ll need to decide how much deposit you want to make on your PCP deal. You’ll also need to estimate your expected annual mileage and decide how long you want the agreement to run for – normally between two and four years.
Guaranteed Future Value (GFV) explained
The lender will use this information to calculate the Guaranteed Future Value of the car, or the GFV. The GFV is a forecast of what the car will be worth at the end of the agreement, based on your initial estimate of your yearly mileage. This value forms the ‘deferred final payment’ and is guaranteed by the lender.
To work out your ongoing payments for a PCP deal, your initial deposit and the balloon payment are deducted from the price of the car. The amount left over, plus interest, is then divided over the term and forms the fixed, payments each month for PCP.
You must be realistic about your expected mileage as excess mileage charges are expensive. You’ll also be expected to return the car in good condition at the end of your PCP deal. Any damage that is not classed as ‘fair wear and tear’ will also be subject to charges. Your contract will detail the terms and conditions of the car finance agreement and so it is important to read your paperwork thoroughly before signing on the dotted line.
At the end of the personal contract purchase agreement, you will have three options.
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You can part-exchange the car for a newer model. If, at the end of the agreement, the car is worth more than the optional payment, you can use this equity as a deposit towards your next car.
PCP finance pros and cons
Pros:
- Fixed monthly payments that are lower than hire purchase
- Lower deposit than other options
- Flexibility when the repayment term ends
- Option to pay car off early
- You're not obliged to keep the car when the term ends
- Guarantee of the future value of the car
- Great for those that like to regularly update their car
- Allows you to buy a car that's newer or higher spec
- Outstanding finance secured against the car, not your home
Cons:
- You don't own the car until you've paid in full
- Can be expensive to own the car at the end of the agreement
- You'll pay extra if you exceed the agreed mileage limit
- You'll pay extra if you return the car with excessive damage
- Voluntary Termination (VT) can be harder to execute, if needed.
How do Personal Car Loans work?
With a personal loan, or unsecured loan, you borrow the full amount and buy your car outright. If you have a good credit score, you will be able to access the best interest rates for a personal loan, which could be cheaper than other options – meaning low monthly payments.
Since the car belongs to you from the beginning of the agreement, you can choose to sell the car at any time after buying with a personal loan.
Personal loans are a good option for customers with a strong credit rating, although the same customers could benefit from the best rates for a new car with other finance options too. It’s also worth noting that a personal loan may be the only option if you’re buying from a private seller.
Pros and cons of taking out a personal loan
Pros:
- A personal loan is the simplest option for financing a car
- Best for those with a good credit rating
- Fixed monthly payments allow you to budget
- Flexible and longer loan period options
- Personal loan not secured against the car
- Can be used for all, or part, of the cost of the car
- Buy from any seller, business or private
- The car belongs to you straight away with a personal loan
Cons:
- You're unlikely to get accepted for a personal loan with a poor credit score
- Many people can't get the advertised rates
- Personal loan amounts are limited, often up to £25,000
What is Guarantor Car Finance?
A guarantor loan can be an option where you have bad credit history and poor credit rating. Guarantor car finance involves a third party agreeing to pay your loan if you can’t make the fixed monthly repayments.
A guarantor loan can provide the opportunity not only to drive a car, but also build up your credit profile and credit rating. However, it is also a big responsibility since your guarantor is liable for your finance if you do not repay it. You can read more about Guarantor Car Finance here
Guarantor Loan pros and cons
Pros:
- Allows you to drive a car when you have bad credit
- You may be offered a lower rate due to the Guarantor security
- Helps you build your credit file, so long as you keep up repayments
- Fixed monthly instalments allow you to budget
- You own the car from the outset
Cons:
- Your Guarantor will be liable if you fail to make monthly repayments
- If your Guarantor fails to make payments, you could both be issued with CCJs, damaging both credit profiles
What is Personal Contract Hire (Leasing)?
Personal Contract Hire (PCH) or Leasing basically means that you rent the vehicle for a set period of time. Personal Contract Hire is great if you like changing your car often but wish to avoid the associated costs, such as a car’s depreciation.
At the start of a lease agreement, you will need to decide on your expected annual mileage and lease period. The higher your mileage, the higher your monthly payment, since the car will be worth less once you hand it back.
You will normally need to pay a deposit upfront, and then monthly payments to lease the car. At the end of the agreement, you will need to hand the car back, and there is no option to buy the car. The car must be returned in an acceptable condition that meets ‘fair wear and tear’ guidelines. Where damage is excessive, charges will apply for the repairs.
Car leasing pros and cons
Pros:
- Allows you to get a brand-new car, more regularly
- You don't foot the cost of your car's depreciation
- You return the car at the end of the agreement
- Road tax and breakdown cover is usually included
- You're usually covered by the manufacturer's warranty
Cons:
- Can cost more over the term than any other finance option
- Advertised costs don't usually include VAT
- Usually only available to those with good and excellent credit
- If you exceed the contracted mileage, you'll be charged additional
- Excessive damage will be charged back to you
- Early termination of the agreement can incur a large fee
- You don't own the car at the end
Car Finance Jargon Buster
The finance industry is full of unusual terminology, which can make applying for car finance even more daunting. Our jargon buster helps shed light on some of the most common car finance terminology.
Frequently Asked Questions
Rates from 9.9% APR. Representative APR 11.9%
How will I know if I can get car finance?
As long as you live in the UK (or have been a resident in the UK for at least three years), you are over 18 years old, and are in employment, you can apply for car finance with us. Complete the online application form for an instant decision.
How will I know what car finance rate I can get?
We will give you an instant, online decision which will give you an expected annual percentage rate (APR) based on your credit profile. Our APRs start from 9.9% for a strong credit profile and rise in line with your credit status.
Can I buy any car?
Yes, as long as it is from a reputable UK motor dealer. If you haven’t found a car yet, we can help you find a quality nearly new or used car from one of our approved dealers. These are car dealers that have been vetted by our finance company for their financial stability and service standards.
Can I get car finance with poor credit?
We’ve helped thousands of applicants with poor credit to get car finance. We have the largest panel of lenders out of any car finance broker. This means we may be able to approve you for a car loan where others haven’t. Start by completing the online application form and one of our car credit specialists will contact you to discuss your options.
What is your best car loan rate?
Our best car loan rates start from 9.9% APR. If you have an excellent credit profile, you are a homeowner, and are over 25 years old, you will usually qualify for this rate. Our offer will be based on the strength of your credit profile, and our unique motor finance technology ensures you’re matched with the best product and lender for your circumstances.
What does representative APR mean?
A representative APR is the rate that the majority of borrowers will receive – it is the rate that at least 51% of customers are offered. You can read more about how car finance interest rates work here.
How do you give an instant car finance decision?
Our specialist motor finance technology assesses your application, credit profile and personal information against the criteria of our large panel of lenders. We can then match your application to the most suitable lender and product. Our goal is to find you the best deal available for your circumstances.
Can I get pre-approved for car finance?
Yes, you can get pre-approved for car finance before committing to buying a car – in fact, it’s very common! Once you find a car, we will amend your loan amount on your application and recalculate your monthly costs. You can also amend the length of your loan, so long as it does not exceed five years.
What if I change my mind about going ahead?
Your loan will not become active until the dealer has been paid for the car. If your loan has been accepted and you have not collected your car, you can change the loan amount or cancel at any time. Your car finance agreement will have a 14-day ‘cooling off’ period, from the date of the agreement itself.
Can I finance a car for someone else?
We are happy to accept joint applications but would always expect the loan to be in the name of the registered keeper of the car.
Can I pay off the car loan early?
Yes, you can pay off your loan at any time. You will receive a rebate of interest if you pay off the loan early. You can also make overpayments with most of our lenders to help shorten the length of your car loan.
What happens with my personal data?
We will not send your data to any third parties other than the lender that has been selected to approve your loan. Our lenders are not permitted to use your data for any other purpose than to process your application for car credit.
How long does it take to get a decision on car finance?
Most of our applications are given an instant online decision. We will also send you an email, usually within a few minutes. Sometimes it takes longer for us to get you the right rate for your circumstances, but we will always contact you within a few hours of your application.
How long before I can collect my car?
There are a number of stages once you’ve been accepted for finance: checking and approval of your ID and proofs; signing of your finance agreement (which you can do online, from the comfort of your home); and release of funds by lender to the dealer. Once the dealer has been paid for the car by the lender, you can then collect your car. The length of time varies dependent on the lender and dealer, and we work as fast as we can to complete your application.
What documents are needed for car finance?
Each lender has their policies on what will be required to prove your identity. As a minimum, you will be expected to produce your driving licence and a selfie. Other documents could include proof of address and proof of income. Your car credit specialist will advise you on the documents needed by the lender to complete your car finance application.
Is there a maximum age of car that you can buy on finance?
Most funders will say that the car must be no more than 12 years old at the end of the proposed finance period. The car must also have mileage less than 100,000 miles at the start of the agreement. We do have funders who will accommodate older cars and higher mileage, but your finance options for those cars will be limited.
Require more help?
Can’t find the information you’re looking for? Need some support or guidance? Get in contact – our friendly and experienced Car credit Specialists are here to help!
Require more help?
Get in contact – our Car Credit Specialists are here to help!
