The Guide to Car Finance for 2024

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. 

In this guide
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What is Car Finance?

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

Pros

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

Pros

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

Pros

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.