Understanding Types of Car Finance
Buying a new car might cost tens of thousands of pounds. Paying in full up front is preferred, but not always possible. Conditions may force you to buy a new car sooner than you can save, such as a written-off car or a larger vehicle for an expanding family.
With car finance, you can spread the cost over a number of months or years, which makes the purchase easier to handle. However, risks and expenses must be considered. Before signing a credit arrangement, investigate and compare your financing options with a proper car finance check.
What Are the Main Types of Car Finance Available Today?
Personal Loan
You can buy a car outright with a personal loan and repay it over a defined time at a fixed interest rate.
Unsecured personal loans allow you to borrow without using collateral like your car or home. If payments are late, collateral allows lenders to repossess and sell an asset. With an unsecured loan, your risk is smaller, but lenders may want a good credit score.
With a car loan, you may get better rates or simpler acceptance. Failure to repay could result in vehicle loss.
Car Details Check lets you compare personal loans and estimate your approval chances before applying. This free service will not hurt your credit. Please remember that we are credit brokers, not lenders. We can assist you in finding a suitable loan package, but we do not give credit.
Hire Purchase
With a hire purchase (HP) deal, you usually pay a down payment to get the car and then make payments every month to cover its cost. You only own after paying the final instalment and a 'option to purchase' charge (typically £100–£200).
In contrast to personal loans, HP agreements safeguard the debt against the vehicles. If you stop paying, the finance company can repossess the car.
Early termination of a hire purchase deal may incur a penalty.
0% Finance
Some cars offer 0% financing. This option requires a deposit and monthly payments. If you make all payments and follow the agreement, you should not pay interest even though you require a large deposit and larger monthly installments.
Leasing
Lease a car to drive without owning it. Instead, you pay depending on the car's value, lease duration, and mileage allowance.
Monthly payments are lower than financing; however, fees may apply. The end of the lease may charge you for excessive wear and tear.
You may need gap insurance and comprehensive car insurance. This protects the finance firm from theft and significant damage.
Personal Contract Purchase (PCP)
PCP agreements are popular but complicated vehicle finance. Pay a deposit and borrow the rest with PCP. Monthly payments cover interest and car depreciation.
Three alternatives are usually available at term end:
- Purchase the car outright by paying the agreed-upon final value (minus deposit) and any additional expenses.
- Start a new PCP agreement to trade in for a new car.
- You can return the car for free as long as it is in good condition and does not have high mileage.
People who want to change cars usually choose PCP because the monthly payments are cheaper. But the interest rates are higher, and you may have to pay extra for damage or extra mileage.
PCP agreements, especially 0% or low-APR ones, require good credit. Before choosing, it helps to find out more about personal contract purchase to see if it is right for you.
0% Purchase Credit Card
Since many dealerships accept credit cards, you can buy your car with one.
High credit limits are sometimes required; therefore, this strategy suits buyers with good credit. It makes more sense for people who want to buy a cheaper car as well.
Credit cards let you choose your monthly payment as long as you meet the minimum. 0% purchase credit cards provide no interest during promotions.
It is crucial to repay on time and pay off the balance before the 0% term ends. Standard interest rates, which can be excessive, will apply otherwise.
How Does a Car Finance Agreement Work in the UK?
You sign a credit agreement with the lender when you finance a car. This strategy lets you pay for the car over time with interest. A car finance agreement is the name for this kind of deal.
Car Details Check explains the different types of car loans so you know your alternatives before signing.
Which Car Finance Option Suits You Best?
The first thing you should do if you want to finance a car is to figure out what kind of agreement will work best for you. Personal loans, leasing, HP, and PCP are common. Next, compare lenders to obtain the best deal for your situation after choosing the finest option.
By explaining finance types and recommending lenders that meet your needs, we simplify this procedure. A proper check vehicle details service can also help you confirm the history of a car before you commit to financing.
Can I Be Approved for Car Finance — and What Do Lenders Look For?
It is possible that having good credit will help you get the best rates and loan for your car. Lenders decide if you are creditworthy based on your credit record, income, and account history.
Car Details Check lets you see if you can get a personal loan or another type of financing based on your credit history before you apply. This lets you know how lenders might analyse your application, so you can safely look at the different offers.
Am I Eligible for Car Finance as a First-Time or Young Driver?
Young drivers may have no credit history. This may make it harder for lenders to judge your ability to repay, lowering your chances of getting auto finance.
Fortunately, you may improve your credit score over time. A guarantor loan, where a parent, relative, or close friend guarantees the debt if you cannot pay, is another option.
What Should You Know Before Submitting a Car Finance Application?
Think about these things before you ask for a loan, credit card, or other form of credit to pay for your new car:
- How much do you need to borrow?
- What can you afford to repay monthly?
- What type of interest rates are on offer? If variable, can you afford payments if rates rise?
- What payback term is best for you?
- How much interest are you willing to pay over the loan period?
- Would you like to own the car? If so, when?
- How long will you retain the car before replacing it?
- Are you ok with mileage limits, and how much driving will you do?
- Are there other fees, such as higher insurance premiums or penalties?
Remember that car ownership includes insurance, road tax, MOTs, fuel, servicing, and repairs. Before you sign a contract to buy a car, make sure you can afford the monthly payments and any other bills that may come up. If you miss payments, it can hurt your credit score, which can make it harder to get credit. A stolen vehicle check is also a wise step to ensure the car is legitimate before financing.
How to Manage Car Finance Repayments Without Stress
It is very important to be responsible with your payments once you have agreed to finance a car. This will protect both your earnings and your credit score. Remember these important things:
- Pay back your debts on time and in full. This will help you avoid late payment fees and bad marks on your credit record.
- Make a regular budget to stay on track with your payments.
- To make sure you do not forget to pay something, set up a direct account.
- While you are paying off your car finance, do not take out too much extra credit. This might make your money problems worse and hurt your credit score.
If you follow these steps, you can keep up with your car finance payments and keep your finances in good condition.
Confused About Your Options? Here's How to Choose the Right Car Finance Plan
| Feature | Hire Purchase | Personal Contract Purchase (PCP) | Personal Loan | Leasing |
| Requires initial deposit | Usually | Usually | ❌ | Usually |
| Own the car outright on Day 1 | ❌ | ❌ | ✅ | ❌ |
| Car is yours at end of agreement | ✅ | Optional | ✅ | ❌ |
| Optional final (balloon) payment | ❌ | ✅ | ❌ | ❌ |
| Fixed monthly payments | ✅ | ✅ | ✅ | ✅ |
| Excess mileage charges | ❌ | ✅ | ❌ | ✅ |
| Secured against an asset | ✅ | ✅ | ❌ | ✅ |
