Car Repayments Explained

Decoding car repayments: key concepts

Understanding auto finance car repayments begins with a few fundamental concepts. Here are some bite-sized definitions of the most important terms you need to know:

Loan principal: This is the base amount you borrow to purchase your vehicle. It doesn’t include the down payment or any value you might get from trading in your old car.

Interest rate: This is what the lender charges for the money-borrowing service they provide. It’s typically expressed as a percentage. Shopping around for the best interest rate is important, as it determines how much extra you’ll pay on top of the loan principal car repayments.

Loan term: This is the duration over which you agree to pay back the loan. While a longer term can reduce your monthly payments, it might increase the total amount of interest you’ll pay over the life of the loan.

Monthly payments: These are what you’ll pay each month, made up of both the principal amount and the interest. The amount is influenced by how much you borrow, the interest rate and the term of your loan. Monthly car repayments may also include other fees applied by the lender.

Understanding different loan options

When it comes to financing your car, there are several routes you can take. Here’s a closer look at some of the most popular car repayments options in the UK:

Hire Purchase (HP)

This straightforward finance plan involves putting down a deposit (although there are plenty of zero deposit options), followed by fixed monthly car repayments. Once you’ve made all the payments, the car is yours to keep. Hire purchase is perfect for those who want to own their car outright at the end of the agreement.

Personal Contract Purchase (PCP)

PCP keeps monthly payments lower by postponing a significant portion of the loan to the end of your agreement. This final chunk is known as a balloon payment, but you’re not necessarily obliged to fork out. When your PCP agreement ends, you can choose to return the car, providing the car is in good working order and within the annual contracted mileage, swap it for a new one or pay the balloon payment along with a small option to buy fee to own the vehicle outright. Flexibility is one of the biggest benefits of PCP car repayments.

Personal Contract Hire (PCH)

Think of PCH as a long-term rental. You pay a fixed monthly fee to use the car but must return it at the end of the term. It’s great for those who like driving newer models and don’t want the hassle of selling the car later.

Personal Loans

These are unsecured loans that give you a lump sum to buy your car. Interest rates might be higher, but they offer more flexibility and aren’t secured against your vehicle.

Navigating the application process

Here’s what to expect when you apply for car finance:

Documents and personal information: You’ll need to gather multiple documents, such as proof of identity, proof of income and details about the vehicle you intend to purchase.

Credit check: Lenders will check your credit score to determine your financial reliability. A healthy credit score usually means more favourable loan terms. Pro tip: when shopping around for car finance some brokers will carry out credit checks to determine your eligibility. Always look for a broker that runs an initial ‘soft’ check that won’t leave a mark on your credit history. Please note however, that should you progress, some lenders may perform a hard search on your credit file.

Approval decision: After reviewing your documents and credit score, the lender will either approve or reject your application. If approved, they’ll clearly outline the loan terms and your car repayment schedule.

Loan pay-out: Once you agree to the terms, the lender will pay out the money to the car seller or dealership.

Savvy car repayment strategies

Car repayments open exciting new doors when it comes to getting behind the wheel. Many Brits are eligible, even with less-than-perfect credit scores. But it’s important to understand your responsibilities as a borrower and keep up with your car repayments. To handle your car loan responsibly, consider the following strategies:

Set a realistic budget

Make sure your monthly car repayments fit comfortably within your budget. It’s better to adjust your budget now than struggle later.

Automate payments

Setting up automatic car repayments can prevent late fees and helps keep your credit score healthy.

Make additional payments

If you can afford it, pay more than the minimum amount each month to reduce interest in the long run and shorten your loan term.

Communicate with your lender

If you hit a financial snag, talk to your lender early to discuss potential adjustments to your payment plan.

A firm grip on the basics of car repayments and a good understanding of different financing options can help you steer clear of common pitfalls and make choices that suit your financial situation, as well as your goals as a motorist.

Simplified auto finance with My Car Credit

Whether you’re eyeing a brand-new Ford Puma equipped with hybrid technology, a versatile Kia Sportage or a zippy Volkswagen Golf, the My Car Credit team is here to help you make smart, informed decisions when it comes to car repayments. This not only puts you in the driver’s seat regarding your financial health but helps ensure a smoother ride in your automotive journey.

So, don’t let finance fears keep you from enjoying the road. Use our handy online car finance repayment calculator to start your journey towards that new car.