Car Finance

April 12, 2013 By Mike Lee
Last updated on July 28, 2015

You’ve seen the car you want, but you haven’t got the money to pay for it! Our car finance guide will hopefully help you understand what finance is available and how to get a good deal.

Lamborghini Money

There Are A Number Of Ways To Finance Your Car Purchase:

With a loan you will own your car from day one.

  • There are secured loans – secured against something valuable like your house. Secured loans can be either fixed rate or variable rate. These are generally longer term loans and cheaper than – unsecured loans
  • Unsecured loans rely upon your disposable income to work out if you can afford the loan. Unsecured loans are fixed rate only.

Note: Dealer loans tend to be of a lower deposit, but higher interest rate

HP (Hire Purchase)
Probably the most popular car finance option. You put a deposit down, then monthly payments for an agreed term. You only own the car at the end of the term if you keep up the payments, therefore you cannot sell the car while still making payments. Sometimes you can make a balloon payment at the end (an agreed sum at the end to keep the monthly payments down). HP is protected by the Consumer Credit Act. Non payments can mean the car can be repossessed.

PCP (Personal Contract Purchase)
You pay for part of the car monthly and then either pay the balance MGFV (Minimum Guaranteed Future Value) at the end of the contract or trade it in or give it back. Your monthly payment may also include servicing and maintenance costs. Shop around for the best deals, as they can vary. Add up the costs and MGFV of each to compare.

PCH (Personal Contract Hire/Lease)
You rent the car long-term. Usually includes maintenance, servicing and road tax. Small deposit (if any), but larger monthly payments, you never own the car and give it back after an agreed period. Mileage restrictions apply.

Extend Your Mortgage (One a friend of mine did)
He basically extended his mortgage to pay for a car, as at the time his interest rates were low. However the period of payments is generally longer and there may be fees involved, as well as the possibility of those interest rates rising. But he didn’t have a large mortgage and felt it was a good way for obtaining his car finance.

Additional Car Finance Info

APR (Annual Percentage Rate)
APR is the interest charged on a debt and should include all charges. Compare monthly payments and final payment amounts. Ask what the total amount payable is.

Warning – Flat Rate.
What looks like a better deal will actually mean you will pay more over the borrowing term. For instance a flat rate of 6% is roughly equal to an APR of 12%. Again – Always ask what the total amount payable is.

Payment Protection
What ever you take out or go with, find out if there is any cover for sickness or redundancy, such as payment protection insurance (PPI). Is there GAP (Guaranteed asset Protection) – this will protect you from shortfalls between your insurance payout and outstanding payment through finance if your car is stolen or written off. There will probably be an extra charge for these.

Credit Card
Be aware that paying for your car with a credit card even for just a deposit can have additional charges imposed by the dealership, not too mention the interest charged by your credit card provider.

Unable To Get A Loan/Finance
Getting finance could be difficult if you have county court judgments or are not registered on a credit reference agency. You can find a number of companies to help you find out why you have been turned down finance.
Mercedes Loan Shark
What To Look Out For

  • Always find out the total amount payable for the whole contract/loan and get this in writing (the lender must do this by law)
  • What is the period of repayment
  • Are there any hidden costs, for documentation/admin
  • There may be certain terms and conditions that will apply with dealer finances, such as maintenance, servicing, insurance type etc (ask)
  • Read the small print
  • Be aware of any limited mileage imposed by dealer finance
  • Early payment penalties – know your rights and periods of cancellation, can HP agreements can be terminated after a period of time – check with the credit company, but you will have to give the car back and there may be additional charges
  • Don’t give out too much info about yourself, car salesmen use this to trawl for better deals – not for you, but for themselves
  • Some dealers make more money from car finance than from the actual car sale itself, make sure you are happy with the person/company you are dealing with!
  • What is the depreciation of the car compared to payments being made, is it worth it?

Further Advice

  • Work out how much money you can/want to borrow
  • Don’t forget to consider the cost of car insurance, road tax, maintanance, servicing, repairs etc
  • Put down as big a deposit as possible
  • Shop around and compare – don’t be rushed or take the first offer
  • Read the small print (again)
  • Haggle – you’ll be surprised at what you could get (maybe easier towards the end of the month or late in the day to get that salesman to budge
  • Ask as many questions as you like
  • Don’t sign anything unless you’re absolutely happy
  • Get everything in writing
  • Oh and don’t crash/write off the car if you still have payments to make!
  • Find out if there is any protection with your finance for faulty vehicles – some will offer money back guarantee’s in such cases.
  • And remember, the car finance you decide to go with is for the term (time) you take it out for – Don’t be left with a financial obligation and no car! Know what you can and cannot afford! Have a look at the car buying guide for help in choosing and looking around your possible purchase
  • And finally, I am a firm believer if you can’t afford it, don’t buy it. Better to save for it and then own it at the right price there and then.