How Do Car Loans Work? A Complete Guide

Of course, like many financial topics, car loans can be a little confusing. Especially if you’re buying your first car or have never taken out a loan before. The good news is, we’re here to help with a complete ‘how do car loans work’ guide.

Read on for everything you need to know about car loans in the UK, including the main benefits of car loans, an intro to industry lingo, some interesting statistics and more.

Car loans: 101

When you look past all the paperwork, car loans are pretty straightforward. Here’s a simple step-by-step how do car loans work guide:

1. First, you choose the amount you would like to borrow. This number can be calculated by subtracting your cash deposit from the value of the car you would like to purchase. Your car loan will make up the difference and allow you to purchase your chosen vehicle.
2. Next, you’ll choose the length of your loan term. This determines how long you’ll have to repay the loan. Payments are usually made monthly. A car loan quote calculator can give you a better idea of costs without harming your credit score.
3. When your loan is approved, the lender will transfer money directly to the approved car dealer you are buying your car from.
4. After the purchase has been made, you’ll start to pay back loan instalments to your lender, usually on a monthly basis.

The key benefits of car loans

Why do so many Brits choose to take advantage of car loans? Here’s a brief look at the key benefits of auto finance:

Increase your buying power

How do car loans work? Car loans give you the freedom to increase your budget and purchase your preferred vehicle, without having to pay outright.

Get behind the wheel sooner

Car loans boost your budget in a matter of days, allowing you to get behind the wheel sooner instead of spending months or years saving.

Car loan lingo explained

Wrap your head around auto finance with this quick guide to car loan lingo:

Agreement term – the total length of your loan.

APR – short for annual percentage rate. This is the additional amount you’ll pay back, on top of the loan. A good car loan lender should offer APR rates from 6.9%.

PCP – short for personal contract purchase. These types of loans include monthly payments, as well as a balloon payment at the end of the loan if you’d like to own the car outright.

Total repayable – the final balance owning, including the loan itself as well as interest, fees, and other payments.

Average car loan repayments

We know that around two million cars are purchased on finance every year but what about repayment figures? Studies suggest the average British motorist puts £194.80 per month towards car finance payments. After rent and mortgage payments, 65% of motorists say their car is the biggest outgoing expense in their life. Interestingly, men spend a little more with payments averaging £215.70. Women are a little thriftier and spend £173.30.

What about insurance?

You’ll still need to purchase insurance when you take out a car loan, so don’t forget to factor this into your budget. Expect to pay around £53.40 a month for car insurance. Again, men tend to have higher premiums and pay around £64 per month while women average just under £42.

Tips for choosing the right car loan

All car loans are designed to increase your buying power but not all contracts are created equal. When choosing a car loan, it’s important to do your research and learn as much as possible before making a commitment. Here’s some tips to help you understand how do car loans work.

Sign on with a trusted provider

Your car loan experience can vary enormously depending on the provider you sign on with. When shopping around for car loans, trust and transparency should be front of mind. Reading reviews is a great way to get a genuine idea of what your preferred lender is like. You can also look for car finance platforms backed by trusted names. For example, Evolution Funding.

Read the small print

No matter how confident you are in your lender, it’s always advisable to read the small print before signing on the dotted line. You never know what could be hidden in the terms and conditions.

Ask questions

A good lender should be happy to answer all your questions without hesitation, no matter how big or small. Ultimately, asking questions about how car loans work will help give you total peace of mind.

Set up a direct debit for repayments

We get it, life can get busy and sometimes loan repayments can slip your mind. That’s why it’s best to set up direct debits for your loan repayments. This way, you’ll never have to worry about remembering to transfer instalments to your lender. Instead, the money will simply come out of your account each month.

As well as making your car loan experience as streamlined and stress-free as possible, setting up a direct debit will ensure you don’t miss any repayments. This is the last thing you want as missed instalments can have a negative impact on your credit history. This leads on to our next tip – never bite off more than you can chew when it comes to car loans.

Borrow a sensible amount

Before committing to a car loan, it’s important to crunch the numbers and make sure your loan is realistic and manageable. It can be tempting to borrow more to increase your budget but at the end of the day, you need to be able to manage your repayments with minimal stress.

Speak to our car loan experts

Want to know more about how car loans work in the UK? Whether you’re purchasing your first car or looking to upgrade your vehicle, we’re here to help. Get in touch with the My Car Credit team today to find out more about competitive car loans backed by an extensive and varied network of car finance lenders.