How Does Auto Finance Work?

So, how does auto finance work? Read on for a complete guide that covers everything you need to know about auto finance. We cut through jargon, unpack the acronyms and break down exactly how auto finance works.

What does ‘auto finance’ mean?

The term ‘auto finance’ is relatively self-explanatory. Like other financial contracts, such as credit cards and house mortgages, auto finance makes big purchases more affordable for everyday Brits.

How does auto finance work? The umbrella term describes a series of credit agreements between the buyer and lender. We take a closer look at the different types of auto finance later on in the article.

Instalments are generally made monthly, though this can vary depending on the type of auto finance contract. Many auto finance contracts are also restricted by caps on mileage and wear and tear. This can work in your favour if your priority is to drive the latest models packed with next-gen technology and driver-assist features.

Does auto finance include interest?

How does auto finance work in terms of interest? Most auto finance contracts incur interest. However, rates are generally far more affordable than taking out a personal loan with a bank or private lender. Interest rates vary depending on the type of auto finance loan you take out.

Auto finance eligibility

Eligibility for car finance depends on a variety of factors. Most importantly, you’ll need to be at least 18-years old and a legal resident of the UK. Tick both these boxes and your chances for auto finance approval drastically increase. Lenders will then start looking at things like your credit score.

What are the different kinds of auto finance?

There are several different types of auto finance to choose from. Finding the right fit depends on your personal preferences and financial situation. We take a closer look at the different options below…

Car loans

Car loans are essentially personal loans designed to purchase vehicles. Cash is borrowed directly from banks or private lenders and used to fund the purchase of a vehicle. You become the outright owner of the car and pay back your loan in instalments, plus interest. 

Personal Contract Purchase (PCP)

Low monthly repayments and plenty of flexibility make PCP contracts one of the most popular car finance options. How does auto finance work for PCP contracts? You kickstart your PCP loan with a cash deposit. The larger your initial deposit, the lower your monthly repayments. PCP repayments are low as you don’t pay for the car itself, rather you cover the vehicle’s depreciation in value. Most PCP loans include mileage caps designed to limit wear and tear.

At the end of the contract, you can choose to make a final ‘balloon payment’ to become the owner of the car. This covers the remaining value of the vehicle. Alternatively, you can return the car and start a new contract. This makes Personal Contract Purchase loans a great option for motorists who love to drive the latest models.

Hire Purchase (HP)

HP loans are similar to PCP contracts, with a few small adjustments. How does auto finance work for HP loans? Deposits are usually around 10%, followed by fixed monthly payments for the duration of the contract. Interest rates are competitive and repayment terms are generally flexible. Unlike PCP loans, HP contracts don’t usually restrict you with mileage caps. This makes them a great option for motorists who plan to use their car for business and leisure.

Like PCP loans, you don’t legally own the vehicle unless you make a final balloon payment at the end of the contract. Otherwise, you’re free to return the car at the end of the contract, without any further payments.

Personal Contract Hire (PCH)

PCH leasing agreements see you lease a vehicle for the duration of your contract. There’s no option to purchase the car and become the outright owner at the end of the contract. Unlike PCP and HP loans, you’re not technically borrowing cash to fund the purchase of a car.

Instead, you pay a non-returnable deposit to initiate the leasing agreement and continue to make monthly ‘hire’ repayments. You’ll need to return the car at the end of the contract. Most PCH agreements are restricted by mileage and wear and tear caps.

Do I need a good credit score for auto finance?

Most lenders will run a credit score check before approving car finance applications. This helps establish your borrowing history and determine the level of risk involved. At My Car Credit, we always start with a soft search. Unlike hard searches, this entry-level financial history check doesn’t leave a mark on your credit score. If you want to know more about your credit score to finance a car, a soft search is the best place to start.

A good credit score will always help you unlock the best car finance deals. So, how does auto finance work without a good credit score? With the right help and guidance, many applicants with poor credit are eligible for car finance. The key is to find a car finance broker with a large panel of lenders. This allows brokers to look beyond traditional lenders and match your application with other options. 

Find the best auto finance deals with My Car Credit

Tracking down the best auto finance deals doesn’t have to be stressful. At My Car Credit, our goal is to connect you with the top lenders in the UK, so you can enjoy stress-free auto finance and the best possible interest rates.

Want to know more about auto finance? Get in touch with our expert team today to learn more about how auto finance works – and your different options.