How Do Car Loans Work? A Complete Guide

Woman applying for a car loan online

Brits are no strangers to car loans, with the latest statistics revealing around two million cars are purchased on finance every year. With so many benefits on offer, it’s no surprise so many British motorists embrace car loans.

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.

Representative APR 8.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed

Good

  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs

Fair

  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit

Poor

  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past

Bad

  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan
£

X monthly repayments of
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 8.9%, annual interest rate (fixed) 8.86%, 47 monthly payments of £184.94 followed by 1 payment of £194.94 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,387.12, total amount payable is £8,887.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

*Initial application is a soft search. Should you progress, some lenders may perform a hard search on your credit file.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!

Why Does Car Financing Take So Long?

Frustrated woman on the phone

Buying a car is a big investment and according to the latest data, more than 90% of Brits take advantage of finance and leasing options when purchasing a new vehicle. They can be a great way to maximise your budget and unlock access to newer and more desirable models without stretching yourself too thin.

While car financing is a popular alternative to purchasing a car outright, it’s doesn’t have the same ‘quicky and easy’ reputation as applying for a new credit card or taking advantage of ‘buy now, pay later’ services like Klarna, Laybuy and Clearpay.

So why does car financing take so long? Securing car financing can take time as there are some important steps that need to be completed before your application is approved. Below, we take a closer look at the car financing process and why it can sometimes take so long.

Why are applicants carefully vetted?

The average motorist spends around £226 per month on car finance payments, allowing them to get behind the wheel of their dream car without laying down an unrealistically high lump sum. However like any lender, car financing companies want to make sure the benefits outweigh the risks when approving applicants.

To do this they carry out credit checks designed to give them an idea of your borrowing habits. While multinational consumer credit reporting company Experian says there’s no ‘magic number’ that will secure you a loan, a ‘good’ score falls between 881 and 960 while an average score sits somewhere between 721 and 880.

Finance & Leasing Association (FLA) 

The car financing industry is strictly regulated to protect both borrowers and lenders. The Finance & Leasing Association is the industry’s leading trade body and is made up of hundreds of members, including banks, independent financial firms and building societies.

Lenders approved by the FLA are subject to stringent protocols, which can slow down the loan application process but ultimately helps to improve the car loan experience for everyone involved.

Despite the challenges presented by issues such as COVID-19 travel restrictions and supply chain disruptions, FLA Director of Research and Chief Economist Geraldine Kilkelly predicts further industry growth over the next year.

“Despite the risks to the economic and market recovery from supply chain disruption, higher inflation and further waves of Covid-19, our latest research suggests that the industry has maintained its optimism about the opportunities for growth,” says Kilkelly. “FLA’s Q4 2021 industry outlook survey shows that 88% of motor finance providers expected new business growth over the next twelve months.”

Compiling your documents

From renewing your driver’s licence to applying for a new passport, most serious applications call for documents and paperwork. Car finance is no exception, with multiple forms, documents and contracts to sign before you get the green light. This includes things like proof of income, proof of address, copies of your driving license and personal bank details. All need to be passed on to your finance lender before you’re approved, which can stretch out the process.

If you’re wondering why does car financing take so long and want to speed up the process, it’s a good idea to prepare in advance and keep all your key documents in an easy to access folder.

Soft vs hard credit checks

One of the best ways to fast-track your car finance application is to kick off the process with a soft credit check. These are quick and easy to run, combing through your financial history without leaving a permanent mark by your name. A soft credit check will give you a good idea of what types of loans and amounts you’re eligible for. Knowing this will help your decision-making process when applying for car loans and boost your chances of approval.

Stay away from hard credit checks, if possible, as these leave a signature on your record. They’re carried out by dedicated credit agencies like Experian and Equifax and dive deep into your financial history. While you’ll probably need to undergo a hard credit check before you’re approved for a loan, this should be the last step and ideally shouldn’t occur more than once. Basically, you only want to go ahead with a hard credit check if you’re certain you’ll be approved.

Speed up the process with My Car Credit

Why does car financing take so long? The truth is it doesn’t have to. With the right people on your team, car financing doesn’t have to be a headache. As part of the largest motor finance broker in the UK, My Car Credit makes finance simple and accessible.

We regularly receive great feedback from our customers about the speed of our service, for example:

“The whole process was very simple. I was assisted by the friendly staff every step of the way. I got a reasonable rate, and it was all terrifically efficient.” Ben B

“Absolutely brilliant, made it very easy and clear and had it sorted and cleared with the car company in no time.” Steven Canning

“Very helpful and extremely quick. Perfect customer service.” Jack Murray

“This was the most efficient and quick process I have experienced. Very helpful, no need to chase, they are always updating you daily – would definitely use again and recommend!” Mrs H

Powered by Evolution Funding, we combine our award-winning technology with access to a broad panel of lenders. This allows us to match you with the best products and lenders for your unique circumstances, improving your chances of acceptance and securing the best possible rates.

It all starts with a car loan quote using our quick and easy finance calculator. When you’ve crunched the numbers and determined your budget, you can get the ball rolling and secure your car financing as fast as possible.

Representative APR 8.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed

Good

  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs

Fair

  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit

Poor

  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past

Bad

  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan
£

X monthly repayments of
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 8.9%, annual interest rate (fixed) 8.86%, 47 monthly payments of £184.94 followed by 1 payment of £194.94 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,387.12, total amount payable is £8,887.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

*Initial application is a soft search. Should you progress, some lenders may perform a hard search on your credit file.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!

What paperwork do I need to get a car on finance?

Woman signing her car finance paperwork

Applying for something finance-related can be daunting for anyone – finding all the paperwork and information that’s otherwise tucked away in a drawer or cupboard can be an overwhelming task. So, here at My Car Credit, we try to make it as easy and straight forward as possible. As with any other kind of finance application, car finance does require a lot of paperwork, but don’t worry because we are here to assist you with that – every step of the way. Here’s a breakdown of all the paperwork and information you’re going to need when applying for car finance with us.

Before the paperwork

We like to start your car buying journey on the right foot, which is why we only require you to complete a simple online application form to begin your car finance journey. This usually takes less than three minutes and asks you for some simple information such as your full name, date of birth, marital status, residential status and your address history for the last three or so years.

Once this has been completed and you have received your online decision on-screen (as well as by email and text), your personal Car Credit Specialist will be in touch to guide you through the whole of your car-buying journey.

To be able to help you with this, your Car Credit Specialist will require some initial paperwork from you.

Driving licence

Your driving licence will be required regardless of any other circumstances.

We need a clear, scanned picture of your driving licence. Alternatively, you can post it to us – don’t worry, we will keep this safe for you and will return it once we are happy that it is your own driving license and that you are qualified to drive the car that you are looking to buy.

Your driving license also acts as proof that you will be the owner and registered keeper of your new car.

A selfie

In order to prove that you are who you say you are in your application, we may ask you to provide a selfie of you holding your own driving license.

With the rise of technology, we have chosen this as a convenient way for you to prove your identity and a good way for us to be protected against fraud.

Proof of employment and earnings

My Car Credit require information on your employment and earnings, so that we can treat you fairly, as a person and a customer. We need to be able to see that you can manage your finances and can afford the agreement you are looking to take out – this is known as an ‘affordability check’. Essentially, we do this to make sure you are protected from getting into any financial difficulty in the future.

To begin your affordability check, we will need you to provide the names and addresses of all of your employers for at least the last three years (sometimes longer if you have frequently changed jobs, or have gaps in your employment history).

You may also be required to prove your earnings, which will require you to send us copies of your payslips, usually accounting for the last three to six months’ wages. This is a simple safety precaution to make sure that your wages are being paid to you.

We might ask you to provide bank statements dating back for a certain period to show your income. If most of your income is cash and doesn’t show up in your bank statements, you may need to show other information to back up your income claims (such as tax return information).

Alternatively, for your convenience, we may ask you take a clear photograph/clear scanned copy and email them to us. However, the copies must be clear enough for us to be able to read all of the details on them.

Bank account details

We will also need the bank account details for the account you will be using for your monthly payments. You will need to provide us with the branch’s address and sort code, as well as your account number.

The account usually needs to be in your name (or jointly in your name). Again, if you have less than three years with your current bank, you will probably need to provide previous bank details.

Where you have a joint bank account with a spouse, we may also need some financial information from them.

Additional information

If there are issues with any of your documentation, your personal Car Credit Specialist will advise you (and in some cases, require you) to give extra information to us. This isn’t uncommon and it’s certainly nothing to worry about.

The requirement for additional information can result from a number of circumstances. It can occur because you have recently moved to the UK and are therefore unable to provide three years residence information. In this case, you may be asked for overseas checks. Alternatively, younger drivers that may not have the relevant employment or credit history, might be asked to submit a guarantor’s information as well as their own.

There are a number of circumstances that may require the submission of additional information, and this should not be seen as a negative sign for your car finance. We only ask for this information to make sure we get the best finance deal for you, and to improve your chances of being accepted.
It is also important to take note that the types of paperwork we will require can differ depending on your credit profile and the lender we are able to match you with.

Here at My Car Credit, we want you to be in your new car as soon as possible so we are trained to help and advise you. Get in touch with any questions or why not start your car buying journey now and click here to apply with My Car Credit?

Representative APR 8.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed

Good

  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs

Fair

  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit

Poor

  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past

Bad

  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan
£

X monthly repayments of
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 8.9%, annual interest rate (fixed) 8.86%, 47 monthly payments of £184.94 followed by 1 payment of £194.94 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,387.12, total amount payable is £8,887.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

*Initial application is a soft search. Should you progress, some lenders may perform a hard search on your credit file.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!