The Guide to Car Finance for 2023

This guide will explain everything you need to know about car finance to understand the process better and get yourself a good finance deal.

When buying a car, either new or used, you don’t have to just buy the car in one lump sum. In fact, most people are unable to do that, as building up the funds for this is difficult and would require a lot of saving. 

So instead of buying cars in this more traditional fashion, another options is to use car finance plans. Car finance can be something that’s scary and confusing for those who haven’t used it before, or who are also unfamiliar with credit products. 

This guide is going to explain everything you need to know about car finance so that you can better understand the process and get yourself a good finance deal in the future.

When buying a new or used car, you don’t have to buy the car in one lump sum. In fact, most people cannot do that, as building up the funds for this isn’t easy and would require a lot of savings. 

So instead of buying cars in this traditional fashion, another option is to use car finance plans. Car finance can be scary and confusing for those who haven’t used it before or are unfamiliar with credit products. 

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What is Car Finance?


Car finance is a type of credit used to purchase a car. Various car finance products are available, from personal loans to hire purchase agreements. 

The main advantage of car finance is that it can help you spread the cost of a car over time, making it more affordable. However, it is essential to remember those car finance agreements usually have interest applied to them, meaning that you’ll be paying back more than what you initially borrowed, meaning that the car will cost you a lot more than what it’s worth.

Ultimately, car finance can be a valuable way to afford a new car, but it is essential to understand the risks involved before taking out a loan.

What are the different types of car finance?

Car finance is an umbrella term to describe multiple different ways that you can purchase a car. This means that there are various types of car finance that you can choose from.

Each option will have unique quirks and differences, making them good choices for different circumstances and situations. 

Here’s a deeper look at some of the more popular finance options that you’re most likely to find being offered by most car finance providers.

Hire Purchase (HP)

One of the most popular types of car finance is Hire Purchase. At its core, the concept of a Hire Purchase car finance plan is pretty simple.

You set down a deposit, make monthly repayments, and then at the end of your repayment term, you own the car, having paid for it in full. 

The deposit you have to pay for a Hire Purchase will usually be at least 10%, so you’ll need a fair bit of funds saved up to afford this. 

When making repayments, you do not own the car. This means that you’re unable to make any changes to the vehicle. So essentially, you’re hiring the car until you’ve paid enough for you to become the owner of it. 

Hire Purchase (HP) pros and cons



Personal Contract Purchase (PCP)

A PCP car finance plan is not that dissimilar to a Hire Purchase plan. Much like the previous option, you’re still required to pay a deposit and need to make fixed monthly repayments.

The difference here is that the amount you need to put down initially is usually higher with a PCP, although that’s balanced with much lower monthly repayment costs. 

These monthly repayments are less because they’re not put towards you owning the car at the end of the finance repayment period.

Instead, you’re only covering the cost of the vehicle’s depreciation. Once your PCP repayment terms are up, you can give back the car to the finance provider and start another agreement for a better, more modern vehicle. 

This type of finance deal is excellent for those who want to drive the newest car possible regularly. If you like the car, you can keep it after making a balloon payment. This is effectively the difference between what you’ve already paid and the car’s initial value. Balloon payments can be pretty expensive, so most people don’t bother with them. 

The thing with PCP finance is that there are many more restrictions on what you can do with the car. Much like a HP option, you can’t make modifications or adjustments, but you’re also likely limited to an annual mileage limit. 

That said, you’ll likely get things like delivery, breakdown cover, road tax, and warranty included in your PCP deal, making them easier to manage. 

Personal Contract Purchase (PCP) pros and cons



Personal Loans

Another finance option is getting a personal car loan to fund your purchase. For many, a car loan is one of the most straightforward types of finance while also being one of the most flexible.

When you get a car loan, you’ll borrow money from a lender and then pay that amount back over time with interest. Once you’ve borrowed the money, you can buy a car from anywhere, such as a dealership or even a private seller. 

Unlike the other car finance options, you own the car immediately when you purchase a vehicle with the funds you’ve gotten from a loan.

This allows you to make modifications, drive without restrictions, and even sell the car anytime – although you’d still have to pay back your loan.

Personal loans pros and cons



How Does Car Finance Work?

Getting car finance shouldn’t be scary for people to understand and go through. In fact, many car finance providers make the process quick and easy for you to manage so that you can get your car quickly without much hassle. 

Each form of car finance works slightly differently, with their quirks being explored in the section above. However, the step-by-step process you’ll likely go through will be similar and follow the same structure.

The first step you will have to face is getting approved for car finance. This is where things like your income and credit history will be checked to see if the lender is willing to offer you car finance. A provider’s initial checks will likely be very surface-level and not require that much detail. 

This is because they’re just giving you an initial quote to see if you’re the type of person they lend to. Once you apply properly for your specific finance, you’ll have to do a more in-depth eligibility check and likely provide things like your bank details, past addresses, and more.

This check could take a few hours as it’s verified, and there’s always a chance that you’re rejected even after you’ve passed the initial assessments.

Once you’ve confirmed your eligibility, the next step will be constructing your finance plan. You’ll likely be given an on-page loan calculator tool to help you figure out the terms of your finance and better understand how much you have to pay back each month depending on how much you borrow and how long you want to pay it back over.

Once you’ve worked everything out and have the details of your car finance, you’ll be able to apply for those parameters. When using the calculator, be aware that this is a representative tool, and your finance offer may differ slightly once you apply properly. 

This is because this calculator will likely use the provider’s representative APR. If an in-depth eligibility check finds that your credit score isn’t that high, you may be offered a greater APR, which makes your loan repayments even more. 

Once you’ve received your car finance offer, you can choose to accept it or decline it. Depending on your car finance type, you may have to pay an initial deposit once you accept it.

From there, if you’ve used a HP or PCP finance option, you’ll get your car and be able to drive it immediately, providing you have insurance.

If you’re getting a car loan, once you’ve been accepted, you’ll have that money transferred to you so that you can purchase your car from anywhere. 

After time, you’ll then have to make your monthly repayments and do so until you reach the end of your loan agreement. These repayments are fixed and should be the same each month.

These repayments will likely come out automatically from your bank account as direct debits, although you also have the option to overpay to help reduce the debt quicker. 

Once the car finance is fully paid off, you’ll then be the car owner if you’ve used a Hire Purchase. If you’ve chosen to go with a Personal Contract Purchase, you can then either give the car back so that you can get a new one, or you can pay to own the vehicle by completing a balloon payment.

This process will be the same no matter where you get your car finance, so by understanding this, you will be in a much better position when getting car finance in the future. 

What is car finance APR?

Whenever you get any credit product, be it credit cards, loans, and of course, car finance, you’ll notice that they’re all affected by a term known as APR. This is something you should pay attention to, as it plays a massive role in determining the total cost of the finance and how much you’ll have to pay back. 

When you take out a loan, you don’t just have to pay back the amount you’ve borrowed. You’ll also have to pay a bit extra for the lender to make any money from the loan. This extra is known as interest, and the best way that interest is represented is through APR.

The APR is different from the interest rate, although it is very similar. APR stands for the annual percentage rate and illustrates the extra money you have to pay for your loan after a year has passed.

The APR rate combines the total cost of the interest as well as any fees, giving borrowers a fair illustration of how much their loan will cost. 

A simple way to think about APR is that it’s a modifier that changes how much you owe. For example, if you borrow £1,000 from car finance on a deal with an APR of 14%, you’ll have to pay the initial £1,000 you’ve borrowed and an additional 14%, which would be £140. 

When looking for car finance, it’s essential to compare the different APRs you’re being offered, as they can seriously affect the value of the finance you’re getting. For example, a car finance loan with a 10% APR that’s paid over two years is better than a loan that has a 14% APR over the same period. 

One thing that borrowers need to remember when comparing APR is that the length of the car finance also affects how much you have to pay back. For example, a finance plan with a 10% APR that is paid off over 24 months will cost you less than a fiance plan with the exact APR that’s being paid over 36 months. 

The reason for this is that interest compounds over time. Compounding is very complicated and is a significant factor in why loans can end up being expensive. In essence, compounding is where interest is applied to your interest. 

How APR is applied and how the length of your repayment affects car finance is why it’s complicated to calculate the costs and parameters of your finance by hand.

That’s why many car finance providers include a loan calculator tool on their sites to help you understand exactly how much you have to pay. 

How to use car finance calculators?


Car finance calculators are great tools to help you visualise how much your loan will cost and determine how much you should expect to pay each month. 

Most car finance providers will have their own calculator that you can use to help figure out the best loan for you, although there are also independent resources which you can use too. Despite that, most of these calculators will work the same way and require you to input the same details. 

To use a loan calculator, you’ll need to input how much you want to borrow. Once you’ve done that, you can also select how long your finance plan will last. With these details, the calculator will be able to determine how much you’ll have to pay each month and also show you the total cost of your loan. 

To find a monthly repayment amount that suits you, you can also adjust the repayment length to find an appropriate amount. Some car finance calculators will also have the option to toggle between the different APRs that the finance provider offers. This lets you see what the loan will cost if you’re offered the representative rate, a rate lower than this, and the rate you may be offered if you have bad credit. 

In addition, some loan calculators may also work by first asking you how much you want to pay each month. By using this, the calculator will tell you how much you can borrow and how long you need to pay the finance plan. 

Be aware that loan calculators are just to be used as illustrative examples to give you a general idea of how much your loan will cost. The actual price and repayment terms may change once you apply for car finance based on your details and financial situation.

How your credit score affects car finance?

To better understand car finance, you need to know how credit works and how it affects the options and loans available to you. Credit is the term used to describe borrowing. When you spend money on a credit card or take out a loan, than money is credit. Essentially, credit means borrowing. 

What users of car finance need to understand is that offering loans and credit is risky for lenders. This is because there’s always a chance that people may be unable to pay the loan back, which can result in the lender losing money.

Banks, lenders, and other financial products have all come together to utilise a credit score rating to combat this. This credit score basically rates you on how reliable you are with credit based on your past track record when using credit and how you’ve generally managed money. 

If you have a good credit score, you’re more likely to be offered car finance and also be offered reasonable rates. If you’ve shown signs of not using credit well in the past, such as being late with a repayment, you may have a bad credit score. 

Having bad credit means that you’re deemed a much bigger risk to lend to. As a result, you may find that you’re turned down for car finance a lot more often and that if you are accepted, your interest rate may be much higher than the representative APR.

Your credit score is essential before you apply for car finance. A good score can enable you to get more favourable deals, whereas a bad credit score could result in you having to pay more interest. You’ll likely find that you can only get car finance for bad credit that offers huge interest rates. 

To make credit scores even more confusing, there is no universal score that all lenders and finance products use.

Currently, there are three leading credit reference agencies that these companies may employ to look up your score, and they all have their unique ranking system to determine what is considered good and bad credit. 

When you apply for car finance, the business you use will likely check your score against any of the three following reference agencies, so it’s essential to know how you rank on them all. 

In addition, these reference agencies will have differing criteria. This means you could have a much better credit score with one reference agency than another. The three main credit reference agencies are: 

  • TransUnion – They use a scoring system from 0 to 710, with a poor credit score being anything considered under 565/710. 
  • Experian – Experian use a scoring system out of 999, with bad credit being considered a score under 720/999. 
  • Equifax – This credit reference agency ranks your credit score out of 1000, with anything below 530 being considered a poor credit score.

What alternatives are there to car finance?

If you feel like car finance isn’t right for you, there are, thankfully, various other ways to pay for a car. Here’s a look at some of the alternatives if you’re not enamoured by the idea of car finance or feel that your credit score needs to be better to be accepted. 

Car Leasing 

One of the most popular alternatives to car finance is leasing. Many people consider car leasing to be within the same category of car finance; however, it is distinct enough for it to be defined as a different way in order to get a car. 

The most significant difference with leasing a car is that you never own it. Instead, the payments you make are to rent it, with the intention that you give the car back at the end of your leasing period. 

Leasing can be seen as being very similar to a PCP finance option, as in both you’re never going to be owning the car and are just renting the vehicle. However, the difference is that you don’t have the option to buy the car when you lease, and it will likely have even more restrictive limitations on you. 

What’s good about leasing is that you do not need to pay a deposit, making it a bit cheaper when you initially start the payment option. However, when leasing a car, you’re likely still going to be responsible for serving it and fixing any issues with the car. 

Buying the Car Outright

If you can pay for a car in one lump sum, then that’s a great alternative to using car finance. The biggest advantage of buying the car immediately is that you become the owner instantly and don’t have to wait till you pay off the finance.

This allows you to make changes and modifications to your car, drive it as often and as far as you want, and you’re also able to sell the vehicle without having to pay back any money when you do so. 

Additionally, buying a car in one sum is likely cheaper overall than using finance. This is because you won’t have to worry about interest increasing your repayments. Plus, you can buy a car with bad credit when you pay for it all at once with your own money, as you don’t need to prove that you have the income to keep up with repayments. 

The only issue when buying a car outright is that it’s expensive, and it can be tough to gather all the money you need to pay off the car.

For most people looking to buy a car in one lump sum, you’ll have to save for an extended period to build up the funds, which could strain your finances.

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Car Finance FAQs

When getting car finance from a responsible provider, you'll need to give them a lot of information about yourself so that they can be sure that you're suitable for that product.

The main things that need to be checked revolve around your finances and if you have the income and built-up capital to reliability afford repayments. 

In addition, car finance companies need to prove your identity to ensure there's no fraud or other issues. 

Expect to provide your personal details, such as your name and age, and you may also need to verify your identity by passing a biometric test. You'll definitely need to present your driver's license, too.

This is to check that you're allowed to drive the car, and it's also a good way for the company to verify your identity further. 

Providers will also ask for your address history when you apply for finance. This is to check if you've been in the country long enough to be eligible for their finance. 

In terms of financial checks, you'll need to provide information about your income through bank statements and give details of your employment history. Things like P45s and P60s are valuable pieces of documentation to have. If you're self-employed, you'll have to prove that your income is secure and reliable. 

Finally, one last thing you'll have to provide is your credit score. When you first make your application, this will be a soft check so that it won't affect your credit history, but when you apply entirely, it will be a hard check and thus can weaken your credit rating for a short time.

To ensure that car finance is right for you, you need to weigh up the pros and cons of the service. There are a few disadvantages to getting car finance, which you should be aware of to compare to the benefits. 

For example, although your monthly repayments will be cheaper than buying a car outright, thus making the purchase more affordable, you will end up paying back more than you borrowed due to interest. 

As well as that, in specific car finance plans, you're restricted in terms of what you can do. In a PCP, you cannot modify your car or sell it, and you may also have annual mileage restrictions. 

Although some finance plans allow you to keep the car at the end of the term, a disadvantage is that your car's value will depreciate significantly over time.

So by the time you've entered your third year of repayments, you've likely already paid back more than what the car is now worth, meaning that you would be effectively wasting money and will struggle to get that cash back when you try to sell the vehicle.

In most circumstances, you can only sell your car once you've finished paying off the car finance and become the vehicle owner. If you're using a HP or PCP finance plan, you don't own the car until you've either made all your repayments or completed a balloon payment.

If you try to sell the car while still paying back your finances, you could get into serious trouble, as you've effectively sold an item that doesn't yet belong to you. 

If you've taken out a car loan and then used that loan to purchase the car from a dealership, you're permitted to sell that car.

That's because, in this situation, you own the vehicle. However, despite selling the car, you still have to repay your loan, meaning that you could be paying back for a vehicle you no longer own.

Most providers will want you to have at least a fair credit rating to get accepted for car finance. This means that you've adequately managed credit and been reliable enough that you can be trusted to pay the finance back. 

Of course, if you have a good or excellent credit score, you'll be much more likely to get better rates and deals, and you'll likely have many more options.  

If you score below fair, you may struggle to get car finance. That said, there are places that specialise in offering car finance for bad credit.

If you have bad credit, all hope is not yet lost. Although you'll find getting car finance much harder, there are options if you use businesses catering to those with bad credit. 

These places will likely have less strict eligibility criteria, and many favour your income and affordability over your credit score.

If you plan on using bad credit car finance, be aware that the APR and interest rates you'll be offered will be relatively high and could significantly increase the total amount you have to pay back.

Getting car finance despite not having an income is tricky, and most places will refuse your car finance. That said, some locations allow benefits, pensions, and inheritance as a form of income.

There are a lot of things you should think about before diving in and getting car finance. You need to consider your situation, how car finance will affect you in the short and long term, and if it's worth it.

Before applying for car finance, you should look at your credit score to see if it's even a viable option. Many apps allow you to check your credit score for free without affecting your rating, and many car finance companies also have an eligibility checker on their site.  

Once you've got an idea of what you can get, you need to figure out your budget and determine what repayments you can afford. This will ensure that you stay moderate and within a limit, you can handle.  

You should also consider the different types of car finance available and choose which ones sound best for you. Never blindly go with the most popular; instead, work out which finance deal will benefit you the most.

When you get offers, calculate all the numbers and compare them to each other so that you understand what car finance offers represent good value to you. 

No single method of buying a car is better than the other. Instead, what suits you will be dependent on your situation and priorities.

If you have all the money required to buy a car saved up, and doing so will not critically affect your finances, then buying a vehicle outright can be a good option as it gives you freedom over the car and how you use it.  

However, if you'd prefer to pay for your car in more manageable chunks over monthly instalments and then return that car after a few years to get a better, more modern option, then a PCP car finance plan may be better instead.  

It all comes down to your needs and specification, so be sure to question what you value the most.

Car finance is a safe service, provided you get it from a well-trusted and legitimate business. When reviewing your options, check if the FCA authorises a provider.

This is the financial conduct authority, and they provide protection to credit product users if that business were to go bust. This means that if a company did go bust while you're still repaying car finance, your investment and money would still be protected.  

Despite being safe from a financial point of view, there is always risk involved when taking out a car loan or car finance.

For example, your monetary situation could change throughout repaying finance, making it harder to repay the finance, thus putting you in a dangerous position.

To ensure that car finance is safe for you, take stock of your financial situation and where you're likely to be in the future to make sure you can afford it. 

Each type of car finance will be best suited to different situations. One type of car finance that's great for one individual will be bad for someone else. That's why these various options exist in the first place so that each finance plan can be tailored to each individual. 

To determine the best choice for you, you need to figure out what you want to get out of your car finance. If you wish for cheaper repayments, then a PCP will be the best option. A HP is the best option if you want to own the car at the end of the term without needing a balloon payment. 

By using this guide to learn all about the different car finance options, you should be able to identify which ones best suit your needs. 

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