The hidden costs of car finance (and how to avoid them)
Car finance is a handy way to get behind the wheel without paying for everything upfront. But while the monthly payments are usually the main focus, there are a few extra costs that can sneak up on you if you’re not careful.
Things like admin fees, mileage charges, or early repayment costs aren’t always obvious at first glance. So in this guide, we’ve highlighted some of the hidden costs to look out for, and how to avoid them where you can.
Interest rates
When you take out car finance, you’re borrowing money. That means you’ll pay interest on top of what you borrow, and this is usually included in your monthly payments.
The interest you’re charged is shown as an APR (annual percentage rate). But the rate you’re offered depends on things like your credit score, how much you’re borrowing, and how long you’ll be paying it back. Even a small difference in APR can make a big difference overall.
How to avoid paying more than you need to:
Get your credit score in the best possible position before applying. A better score could help you get a better interest rate.
Keep the loan term as short as you can comfortably afford. Longer terms generally mean lower monthly payments, but they can mean more interest overall. So, in the long run, they cost you more money.
Please note: The interest rate you are offered depends on various factors, including your credit score, financial circumstances, and the terms of the agreement. A good credit score may increase your chances of securing a lower rate, but the final rate is determined by the lender.
Deposit
Some car finance lenders may ask for a deposit at the start. This is usually a percentage of the car’s value. A bigger deposit could help reduce your monthly payments, because you’ve already paid something towards the car.
But not everyone has cash sitting around, and a deposit can come as a bit of a surprise if you weren’t expecting it.
How to deal with deposits
Look into no-deposit car finance deals if you’d rather not pay anything upfront (just bear in mind this might mean larger monthly payments).
If you have a car already, consider using it as a part exchange to help cover the deposit of your new car.
It’s really important to make sure the deposit fits your budget and that you don’t stretch yourself too thin at the start of your agreement. Keep short and long-term finances in mind from the beginning.
Admin fees
Some lenders charge admin or arrangement fees to get your agreement up and running. These might be added to your monthly payments, or you might need to pay them separately.
They’re not always huge, but it’s worth knowing about them in advance so you can factor them into your budget. Ask upfront whether any admin or setup fees apply, to avoid surprises.
Early repayment charges
If you’ve changed your mind about your car and want to pay off your finance early, some lenders charge an early settlement fee. This is often a way of covering the interest they expected to earn through the duration of your loan term.
The fee could be a fixed amount or a percentage of what’s left to pay. So it’s worth checking the small print of your contract or asking your lender about fees, just in case this is something you want to do down the line.
How to avoid surprises:
Ask about early repayment terms before signing your agreement
Choose a lender that offers more flexibility if early repayment is something you think might consider later
Note: Always check the terms and conditions of your loan agreement for early repayment options and charges.
Excess mileage charges
If you go for a PCP or PCH deal, you’ll agree on a mileage limit at the start. It helps the lender predict the car’s value at the end of the term, because the more miles you do, the more wear and tear the car has.
So, if you drive more than the agreed amount, you’ll likely be charged for the extra miles when you return the car. These charges can really add up, especially if you do a lot of driving!
How to avoid mileage charges:
Be upfront about how much you drive each year. It’s definitely better to pay slightly more each month than face a big charge later
Some lenders may let you adjust your mileage during the agreement, so ask if that’s possible first
Balloon payments
If you want to keep the car at the end of a PCP deal, you’ll have to pay what’s known as the ‘balloon’ payment. This is a final lump sum and can be thousands of pounds, depending on the car.
It’s optional, but if you haven’t planned for it, it can catch you off guard. Remember, you don’t need to pay the balloon payment, it’s only if you want to keep the car.
How to prepare for a balloon payment:
Before signing your agreement, check how much the balloon payment will be
If you’re planning to buy the car, start saving early so you’re ready when the time comes
You could also consider refinancing your balloon payment which would allow you to spread the cost over time
Maintenance and repair costs
When you finance a car, it’s still your responsibility to keep it in good condition. That means servicing, MOTs, repairs, and general wear and tear. If you hand a car back in bad condition, you may have to pay a fine if it’s considered more than ‘fair wear and tear’.
How to maintain and avoid repair costs
Keep on top of regular maintenance to help avoid bigger repair bills later
Be extra careful when you drive to avoid big scratches or dents
Fix any minor damage before returning the car. It might be cheaper to do it yourself than pay the fee
Negative equity
If your car’s value drops faster than your repayments, you could end up in negative equity. This is when your car has depreciated in value, and you now owe more than the car is worth.
If you’re in negative equity, it can make it more costly to change cars or settle your agreement early, because you have to pay the difference.
How to reduce the risk of negative equity:
Consider putting down a bigger deposit if you can, to lower the amount you borrow
Keep the loan term as short as you can comfortably afford to help stay ahead of depreciation
Choose cars that hold their value better to reduce the chance of depreciation
The takeaway
Knowing what hidden costs might pop up during your car finance agreement can help you plan ahead and avoid stress later.
At Car Finance 247, we’re here to help you find a deal that works for you. No hidden fees, no surprises. If you're ready to get started, you can get a quote with us today.
Disclaimer: The information in this guide is for general informational purposes only and should not be considered financial advice. The actual costs and terms of car finance agreements can vary depending on individual circumstances, and this guide does not constitute an offer or recommendation. We encourage you to speak with a qualified advisor or your lender to discuss specific terms before committing to a car finance agreement. Car Finance 247 cannot be held responsible for any discrepancies in the terms offered by individual lenders.