Explore the different types of car finance available, and learn how to choose the best option for your budget and needs. Our guide makes it easier to make decisions about car loans, so you can find the best one for you.
Types of Car Finance:
Buying a new car can feel like a huge financial leap. Many cars cost tens of thousands of pounds, so it's not always possible to pay for them all at once. Life has a way of throwing curveballs – whether it’s a car that’s no longer working or a growing family that needs more space.
A lot of people use car financing to make buying a car easier. You can pay for it over months or years instead of all at once. To make an informed decision, it's important to know about the various car finance options.
There are different car finance types to consider, and each has pros and cons of its own. To help you find the best option, our car finance checker can assess your eligibility and provide detailed reports, so you know everything you need to know before you decide.
What are the main ways to finance a car these days?
When it comes to buying a car, you don’t always have to pay upfront. Car financing options help you spread the cost over time, making it more affordable. Let's look at the most common types of car finance in the UK to help you decide which is best for you.
1. Personal Loan
A personal loan is one of the most straightforward car purchase options. In this case, you can borrow money to buy a car and pay it back over time. The best part? Personal loans are usually unsecured, which means you don't have to put any of your property at risk.
The disadvantage is that you may require a high credit score to qualify for the best rates. If you choose a secured loan, on the other hand, your car is used as collateral, and if you don't make your payments on time, you could lose your car.
2. Hire Purchase (HP)
With a hire purchase agreement, you can pay for the car over time, but you don't actually own it until the last payment is made. In most cases, you'll pay a down payment and then monthly payments. But this isn't like a personal loan, where you own the car right away.
The lender can take back the car if you don't make payments on time because it's a secured option. To see how they differ from hire purchase plans, find out more about personal contract purchase options.
3. Personal Contract Purchase (PCP)
Personal Contract Purchase (PCP) lets you pay a down payment and monthly payments that are based on the car’s depreciation. The main difference is that at the end of your contract, you can either buy the car outright, trade it in, or return it.
People who like to change their cars often choose this option. However, there can be extra fees for exceeding mileage limits or returning the car in poor condition. Be sure to read the fine print.
4. 0% Purchase Credit Card
If you want to buy a car all at once, you might want to look into a 0% purchase credit card. This gives you a set amount of time to pay back the loan without any interest. You should take advantage of the offer, but be sure to pay off the balance before the interest starts to build up.
This option is most suitable for those with a good credit score. Just remember that you might have to pay a lot of interest if you miss payments or don't pay off the balance on time.
5. Leasing
Leasing is another option, especially if you don't want to own the car. With leasing, you pay a fixed monthly fee to use the vehicle, but you never own it. At the end of the contract, you can either return the car and walk away or begin a new lease on a different vehicle.
Though your monthly payments may be lower, keep in mind that you may face penalties for excessive mileage or damage to the vehicle.
How Does a Car Finance Agreement Work in the UK?
You make a deal with a lender when you finance a car. In other words, you won't pay for the car all at once, but rather over time. Interest will be added to the loan balance, which will make the total cost more than the original price.
There are different car loan types available, each with its own rules. Pick the one that works best for you and your budget.
Which Car Finance Option Suits You Best?
Before you choose a car loan deal, you should think about what will work best for you. There are various car loan types available, including personal loans, leases, hire purchases, and PCPs. Each option has different benefits, depending on how long you want to keep the car and how much you can afford.
Compare the different types of car finance and pick the lender that gives you the best deal.
Can I Be Approved for Car Finance — and What Do Lenders Look For?
Getting approved for car finance depends on a few factors. If you have good credit, your chances of being accepted may go up. Financial institutions check your credit report, your income, and any other information they already have about you, like whether you're a customer.
To get the best deal when applying for different types of vehicle finance, make sure your credit history is in good shape.
Am I Eligible for Car Finance as a First-Time or Young Driver?
Getting car finance can be hard for new or young drivers, especially if they don't have a lot of credit history. Lenders may have a hard time figuring out if you can pay back the loan, which could make it less likely that you will be approved.
But there are things you can do to make your chances better. You can work on improving your credit score, which could increase your finance options for cars. Another option could be a guarantor loan, where a parent or friend steps in to cover the repayments if you are unable to pay for some reason.
What Should You Know Before Submitting a Car Finance Application?
Before you go for car finance, it’s good to think about a few things. Check out this list of important stuff to consider:
- How much do you need to borrow? Make sure you know the exact amount you need for your car purchase.
- How much can you afford to repay each month? Be realistic about what you can afford to avoid financial strain.
- What kind of interest rate are you getting? If the rate changes, make sure you can handle any future increases.
- What’s your preferred timeframe for repaying the loan? Think about whether you'd prefer to pay off your loan quickly or take a bit more time with smaller monthly payments.
- What is the total amount of interest you are prepared to pay? This will influence the overall cost of your vehicle over time.
- Do you want to own the car soon? Some finance options let you own the car after a short time, while others may take longer.
- Are you comfortable with mileage limits? Some agreements include restrictions on how much you can drive.
- Are there additional costs? Watch out for extra costs like insurance, repairs, or penalty fees for excess mileage.
Also, keep in mind that owning a car comes with some ongoing expenses, such as insurance, road tax, MOTs, and fuel. Make sure you can afford these expenses in addition to your finance payments. Also, missed payments can harm your credit score, making future credit more difficult to obtain.
To make your purchase easy and enjoyable, consider using our car reg checks and a stolen car check to verify your vehicle’s history.
How to Manage Car Finance Repayments Without Stress
It's important to be careful with your payments once you've agreed to a car loan plan. Making your monthly payments on time is very important. To avoid late fees and damage to your credit score, always try to pay on time and in full.
The best way to make sure you can pay your bills each month is to make a budget. To make sure you never miss a payment, you might want to use direct debit.
While you're paying off your car, don't take out any extra loans. It could hurt your credit score and make it harder for you to pay your bills. Remember that being good at making payments can help you when you want to finance a car again in the future.
Confused About Your Options? Here’s How to Choose the Right Car Finance Plan
It can be hard to pick the right car loan. Here's a simple list to help you make your choice:
- Hire Purchase (HP): You have to put down a deposit, and at the end, the car is yours. Payments are fixed, but they are secured against the car.
- Personal Contract Purchase (PCP): You have to make a deposit, and you can also make a final payment if you want. You can either return the car or trade it in, but you'll have to pay extra for the miles you drove.
- Personal Loan: No down payment is needed, and you own the car from the start. The payments are set, but it's not secured against the car.
- Leasing: You have to put down a deposit, and you never own the car. There are fees for extra mileage, and the car must be returned at the end.
