Paying for a New Car with a Loan – How It Works

Understanding car loans: the basics

Let’s start with the fundamentals. Car loans are a type of financing product specifically designed for auto purchases. They allow you to borrow a certain amount of money from a lender, which you then repay over time, usually with interest.

Choosing the right loan

When it comes to paying for a new car with a loan, one size does not fit all. Before applying, it’s essential to consider your individual circumstances and preferences. Here are some key factors to keep in mind when vetting lenders and loan products:

Loan amount: Determine how much you need to borrow based on your budget and the cost of the car, as well as any additional fees.

Interest rate: Shop around for competitive interest rates to ensure you’re getting the best deal possible. Variables like your credit score can impact the interest rate offered when paying for a new car.

Loan term: Agree on the length of the loan, keeping in mind that longer terms can unlock lower monthly payments but higher overall interest costs.

Additional fees: Ask about any additional charges, such as late payment fees. Some lenders may also charge extra for early repayments. Ask lots of questions to avoid unwelcome surprises down the line.

Types of car loans

When exploring car financing options, you’ll see various types of loans tailored to different needs. There are a few acronyms to decipher, but really, it’s quite straightforward, and there’s no need to be intimidated. Here’s a breakdown of the main ways of paying for a new car in the UK with a loan.

Hire Purchase (HP): With HP loans, you pay a deposit upfront (although there are plenty of zero deposit options too), followed by fixed monthly payments over the lifetime of the agreement. Once you’ve made all the payments, you own the car outright. HP is a clear-cut financing option suitable for those with an end goal of full ownership of the vehicle.

Personal Contract Purchase (PCP): PCP lowers monthly payments by deferring a significant chunk of the loan amount to the end of the agreement. At the end of the term, you can choose to return the car, provided the vehicle is in good condition and within the contracted mileage, trade it in for a new model or make a final ‘balloon payment’ along with a small option to purchase fee to own the vehicle outright.

Personal Contract Hire (PCH): PCH is similar to PCP but involves leasing the car rather than owning it. You pay fixed monthly payments for the duration of the lease and return the car at the end of the agreement. It’s a great option if you love to drive the latest models. However, PCH agreements often include mileage restrictions and wear-and-tear guidelines.

Personal Loans: Personal loans can be used for various purposes, including paying for a new car. You receive a lump sum of money from the lender, which you then repay with interest over time. Personal loans offer flexibility, but the options may be limited for those with a poor credit profile.

The application process: what to expect

Once you’ve done your homework and selected a suitable loan, it’s time to apply. Here’s what you can expect during the application process:

Documentation: Prepare requested documents, including proof of identity, income verification and details about the car you want to purchase.

Credit check: The lender will request a credit report to evaluate your status and set the terms of the loan. A healthy credit score can improve your chances of approval and result in more favourable terms, including lower interest rates.

Approval decision: After reviewing your documents and credit rating, the lender will either approve or decline your application. If approved, you’ll receive details about the loan terms, including the interest rate, amount, and repayment schedule.

Loan pay-out: Once you’ve accepted the loan terms, the finance company will transfer funds to the seller or dealership, allowing you to complete the purchase of your new set of wheels.

Paying for a new car: managing your loan responsibly

With the loan secured and a set of keys in your hands, it’s time to focus on repayments. Here are some tips for managing your loan responsibly:

Budgeting: Incorporate your loan payments into your monthly budget to ensure you can afford them comfortably. Prioritise your payments over other less-important expenses to avoid defaulting on your loan and dragging down your credit score.

Automatic payments: Consider setting up automatic deposits when paying for a new car. This will ensure your loan payments are made on time. This can help you avoid late fees and maintain a stellar payment history.

Extra payments: If possible, consider making extra payments towards your principal loan amount. This will help you pay off the loan faster and reduce the total interest paid.

Communication: If you run into financial difficulties or anticipate missing a payment, communicate with your lender proactively. They will be more understanding than you might think and can usually offer assistance or alternative payment arrangements to help you avoid defaulting.

Drive towards success with My Car Credit

Whether you’re looking to lease a brand-new Nissan Leaf or work towards full ownership of a used Toyota Highlander, paying for a new car with a loan can open new doors when it comes to getting behind the wheel. At My Car Credit, we’re riding shotgun to help you understand the basics of car loans, choose the right product for your needs, navigate the application process, and manage repayments responsibly – so you can get behind the wheel with confidence.

Try out our fantastic online car finance calculator to see an instant breakdown of your expected monthly payments, typical rate and total payable.