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Your car finance options explained

Buying a car is one of the few major purchases you'll make in your life, so it's important to do it right.

While the process of car shopping can be a thrilling experience, you also need to be sensible and realistic about what you can afford.

That's where car finance comes into the equation.

If you're on the lookout for a new car with a budget in mind, but you're not quite sure how to pay for it – you've certainly come to the right place.

Our guide below is sure to benefit you along your own personal journey to getting your next car – whichever route you choose to go down.

A women drinking coffee on a laptop

How does car finance work?

The term "car finance" applies to the process of paying for a vehicle over a set period of time, as opposed to buying it outright with a cash payment.

The most common types of car finance agreement are hire purchase (HP), personal contract purchase (PCP), lease purchase or personal loan, though other options are available also.

The payments you make over this period can depend on several factors - including the amount you're looking to borrow, the length of time you intend on keeping your car, and ultimately, what type of agreement you have.

With many options available, it's important to understand how they differ and why one option may be better suited to you than another.

What are the different types of car finance?

There are multiple ways to pay for a car on finance.

Here we're going to breakdown some of the more common car finance types:

What is hire purchase (HP)?

Hire purchase means that you're hiring the car from the lender until you've paid for it in full. The loan is secured against the vehicle itself, and you won't officially own it until the final payment has been made.

It is one of the most commonly used forms of car finance.

If you take out a hire purchase agreement, you can choose whether to pay a deposit up front - followed by regular monthly payments over an agreed period of time.

The size of deposit you put down will affect your monthly payments.

Once all agreed monthly payments have been made, the car will legally belong to you and the finance agreement will end. With a hire purchase agreement, you have the option to pay off the outstanding finance at any point by requesting a settlement figure from the lender.

What are the pros of hire purchase?

  • There are no mileage restrictions imposed.
  • You don't need to find the money to pay a large lump sum payment at the end of the agreement.
  • Payments are fixed over the entire period – which enables you to budget more easily
  • With any hire purchase agreement organised through CarFinance 247 – we carry out thorough checks on the supplying dealership as an added form of protection.
  • When you've paid back half of the full total repayable amount, you're free to opt for Voluntary Termination (VT) – meaning you're free to hand the car back if you need to.
  • With the finance agreed upfront – you're in a better position to negotiate on the price of your vehicle.

What are the cons of hire purchase?

  • Monthly payments are usually higher than for hire purchase agreements in comparison with other finance options.
  • The loan is secured against the car. This means that if you fail to meet your monthly repayments, the vehicle can be repossessed.
  • Failure to make regular repayments could also negatively impact your credit score.

How does hire purchase work?

Let's say you want to buy a car listed for £12,000 through a hire purchase agreement lasting 4 years (48 months).

You put down a deposit of £1,000 and get offered an APR of 25.4%.

Your example breakdown might look a little something like this:

Car value £12,000
Deposit £1000
Amount to finance £11,000
APR 25.4%
Total repayable £16,879.42
Term 48 months
Monthly repayment £351.65
Car owned at the end of agreement? Yes
*Note: The APR you're offered will be dependent on your credit rating and the lender you're borrowing from.

What is a conditional sale?

A conditional sale (CS) agreement is the same as a Hire Purchase agreement, except that you will automatically own your car after the finance has been paid. Conditional sales may or may not include a balloon payment at the end of your agreement.

What is a personal contract purchase (PCP)?

A personal contract purchase (PCP) agreement is similar to a hire purchase agreement, in the sense that you'll have the option to pay a deposit followed by fixed monthly repayments over a set period of time (typically 24-48 months).

However, at the end of the fixed term, you'll have the option to either hand the car back, use the equity as a deposit for your next vehicle, or obtain ownership of the vehicle by paying the Guaranteed Minimum Future Value (GMFV) (also known as a “balloon payment”).

There will be a clause in your agreement which states what the maximum annual mileage on the car can be. Should you exceed the maximum annual mileage, or the vehicle is subject to damage that is not classed as general wear and tear, there may be charges set by the lender.

You can find further information around charges in your initial finance agreement.

What are the pros of PCP?

  • Gives you the flexibility to either keep the vehicle or hand it back at the end of the agreement.
  • Monthly payments tend to be lower as there is a large lump sum due at the end of the agreement.
  • Fixed cost over a set period of time that is secured against the purchase of the vehicle. This enables you to budget more easily.
  • You're in a better position to negotiate on the price of your vehicle with the finance agreed upfront.

What are the cons of PCP?

  • If you decide to give the car back at the end of the agreement, there will be charges if the vehicle is returned in a different condition to that stipulated in your agreement, for example excess mileage or vehicle damage.
  • If you decide to keep the car, you will have to pay the balloon payment/GMFV – equivalent to the estimated market value of the car at the end of the term. This figure will be given to you before you sign the agreement.
  • Interest on the GMFV is included in the monthly payments, regardless of whether or not you are looking to keep the vehicle at the end of the agreement.

How does PCP work?

Let's imagine you sign up for a 4-year (48 months) PCP deal on the same car listed at £12,000.

When you discuss a PCP agreement, one of the first things you'll need to declare is your annual mileage.

Let's say you agree to 10,000 miles as your annual limit.

The next thing is the deposit. The more money you put down – the less you'll pay back on a monthly basis.

In this case, you choose to put down £1,000 of your own money.

The lender is likely to have already calculated the GMFV of the car at this point. This is what they believe the car's value will be at the end of the agreement.

If the calculated GMFV is £4,200, and you decide to keep the car at the end of the agreement, the balloon payment will also be £4,200

Here's what your breakdown could look like in this instance - if the lender offers you the exact same APR...

Car value £12,000
Deposit £1,000
Amount to finance
(minus the end of term balloon payment)
£6,800
APR 7.9%
Term 48 months
Monthly repayment £195.01
Annual mileage 10,000
Total amount repayable
(with balloon payment)
£14,560.48
Total amount repayable
(without balloon payment)
£10,360.48

How does PCP work at the end of the contract?

At the end of the contract, however long that may be – you usually have 3 choices to make.

A)   You return the car... and walk away.
If you've no interest in owning the car outright or starting on another PCP deal – you can hand the car back to the dealer after the term ends – without paying the Guaranteed Minimum Future Value (GMFV).

Again, just bear in mind that there will be additional charges if you've gone over your agreed annual mileage limit, or the car is damaged beyond reasonable wear and tear.

B)   You return the car... and start again on a new PCP agreement.
If the car is worth more than the outstanding finance (or resale value), the remaining equity can be repurposed for a deposit on a new PCP agreement.

Many people go down this route as it often enables them to drive a more expensive car at a more manageable monthly repayment than they would ordinarily pay with less of a deposit to put down.

C)   You pay the balloon payment and the car becomes 100% yours.
If you wish to keep the vehicle and can afford to pay the balloon payment to make it yours (many people take out a separate loan to enable them to do this) – then this is definitely an option you could consider.

Bare in mind however, you could still incur additional charges for exceeding your maximum annual mileage, so it's important to keep an eye on this.

A note on ending PCP early

Every car finance agreement has a built-in clause that legally gives you the right to terminate the contract (Voluntary Termination) once you've paid off half of the total repayable amount.

However, the mechanics of PCP make this very difficult. When you factor in the deposit, lower monthly repayments and the large balloon payment attached to the agreement – the likelihood is that you won't pay back half of the loan until you're deep into the contract.

If you hit financial trouble earlier in the contract, things can get complicated – so be sure to factor this into your decision.

What is a personal loan?

A personal loan (also known as an unsecured loan) enables you to borrow an amount of money over a fixed amount of time.

If you choose to take out a personal loan to buy a car, you will own the car from the time that the dealer receives the money for it.

This loan is not secured against the vehicle itself (unlike a PCP or hire purchase agreement), meaning that you can sell the car at any time without needing permission from your finance company beforehand.

What are the pros of taking out a personal loan?

  • As you already have the finance agreed, this could put you in a better position to negotiate on the price of your vehicle.
  • This type of loan is not secured against the car, meaning that the car cannot be repossessed.
  • You can sell it at any time during the agreement, provided that you continue to keep up with repayments.
  • Payments are fixed for the whole loan term – meaning that your monthly repayments remain the same, allowing you to budget better.
  • With a personal loan, you can buy a car from any dealer, or even from a private seller.

What are the cons of taking out a personal loan?

  • If you have a poor credit history, you're less likely to get accepted for a personal loan.
  • Maximum loan values do not usually exceed £25,000.
  • With a PCP or hire purchase agreement, we carry out thorough checks on the dealership to ensure they are reputable. With a personal loan however, these checks are NOT carried out.

How does a personal loan work?

Taking out a personal loan, provided you can afford to make repayments, is a great choice if you want to own your car outright.

Let's imagine you've got your eye on a used car worth £12,000.

You want to borrow the full amount so you can pay for the car when you pick up the keys. You want to pay this back over a 4 year period (48 months).

Based on the fact you have a fair credit score; the lender offers you an APR of 18.2%.

Your example breakdown in this case – would look like this:

Car value £12,000
Loan Amount £12,000
APR 18.2%
Term 48 months
Monthly repayment £345.23
Total repayable £16,572.22
Total cost of credit? £4,572.22

What is a guarantor loan?

A guarantor loan is often suggested if the individual wanting to take out the agreement has a particularly poor credit rating.

This is because it involves a third party (usually a relative or friend) acting as a guarantor. If you fail to keep up with repayments, the guarantor will subsequently pay the monthly payments on your behalf.

What are the pros of a guarantor loan?

  • Ideal for people who have difficulty in getting an approval for finance.
  • If you keep up to date with the monthly repayments, it can help to rebuild your credit score.
  • Fixed monthly repayments over a set period of time.
  • With the finance already agreed you're in a better position to negotiate on the price of your vehicle.

What are the cons of taking out a guarantor loan?

  • Typically, a higher APR than other forms of finance.
  • You must have someone willing to act as your guarantor and agree to pay the monthly costs if you are unable to.
  • In most cases, the guarantor has to be a homeowner (which limits your options somewhat).

What are the pros of leasing a car?

  • You have the option to have a brand new car every few years.
  • You never have to worry about the depreciation of the vehicle as you don't own it.
  • As it is a new car you're leasing, you receive a manufacturer's warranty that usually lasts a minimum of 3 years.

What are the cons of leasing a car?

  • In order to be eligible for a lease agreement, you will likely need a good to excellent credit rating.
  • Upon handing the car back, if the mileage or condition of the vehicle do not meet the lender's expectations – as stated in the contract – you will be liable to pay additional charges.
  • You are tied to the contract in the sense that if you decide you no longer like the car or cannot keep up with the payments, your only option is to cancel the contract which usually involves a minimum 50% charge of your remaining total.

Other Considerations

There are a few additional things to think about when it comes to car finance options.

Some you'll perhaps already be familiar with and some are more relevant to certain types of car finance than others – however it's useful to be aware of these things if you're currently in the mind-set of exploring car finance.

No deposit car finance options

You don't necessarily need to put a lump sum down to secure car finance.

Provided you meet the necessary eligibility criteria – you may be able to try no deposit car finance.

No deposit car loans enable you to get a new car without having to make any payments in advance (although you might need to pay a small reservation fee in some cases).

Part-exchanging

Again, you don't need to pay a cash deposit.

You can part-exchange your current car towards the deposit, or – you could part-exchange a car as part of the transaction itself.

Part-exchanging is also an effective way to offload your old car. It takes the admin and time out of facilitating the sale yourself.

When it comes to deposits, if you don't have the cash, or a car to part-exchange – then it might be worth exploring no deposit finance as an option.

Financing a car with
CarFinance 247

The most popular type of car finance taken out by our customers is hire purchase (HP) – although we do provide other finance options.

With access to a large panel of lenders, we're able to help customers secure a car finance option to suit them.

We can also offer personal loan and guarantor loan agreements, with a number of our customers finding that these solutions fit their individual circumstances.

If you have an idea of what sort of budget you're working with – our car finance calculator is a quick and easy tool that helps give you an idea of how much you'll be able to borrow.

Upon making an application for finance with us, we work hard to find the best finance option available for you.

If approved, we'll then provide you with a no obligation quote and discuss the terms of the finance approval in detail. When you're happy, it's time to start looking for your car!

So whether your credit history is poor or excellent we'll do our utmost to find you a suitable finance option and get you in your new car in no time at all.

If you've got a question or want to know more about how CarFinance 247 works, contact our customer services team who can explain everything you need to know!

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