Before you sign on the dotted line with the finance plan that your dealership is offering, it’s a good idea to shop around and compare deals from a wide range of lenders.
If the only thing between you and the open road is a new car loan, and you’ve got your eye on a car, use our guide to learn how to get a solid rate and calculate your overall costs. Then compare your lending options to find a great deal for your budget.
Warning: Late repayments can cause you serious money problems. See our debt help guides.
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What is car finance?
Put simply, car finance is the process of funding a vehicle purchase over a set period of time.
What types of car loans/finance are available?
The cheapest way to buy a car is to buy it without borrowing money. If you can save a regular amount and only make the purchase when you’ve built up enough money, then you won’t pay a penny in interest. If however you do need to borrow in order to purchase your next car, then remember that in general terms, the more you borrow, and the longer the period over which you borrow it, the more you’ll end up paying in interest. If you can afford to, make part of the payment using your own money in order to reduce the amount you need to borrow.
If you aren’t buying a car outright with cash, then there are a few different ways to fund your purchase. Here are some of the main ways:
- Personal loan
- Hire purchase
- Personal contract purchase
- Credit card
A broker, such as Zuto, can quickly provide personalised quotes for different forms of vehicle finance based on your answers to a few simple questions.
Buying a car with a personal loan: Pros and cons
Personal loans are available from a range of lenders – including banks, building societies and supermarkets. Personal loans are generally available over terms between one and seven years. Each lender will have it’s own interest rates, fee structures and amounts available. If you apply for a personal loan, the lender will look at factors like your income, expenditure and credit score when deciding whether or not to approve the loan. Once approved the funds are transferred to your account and you’re free to make your purchase. Compare personal loans from a range of lenders.
- No compulsory deposit (although you can pay a deposit if you wish).
- You own the car outright from day one.
- Because you own the car, there are no restrictions on mileage.
- You know exactly when the loan will be paid off (and if it’s a fixed rate product, you also know exactly how much it’s going to cost in interest).
- Because there’s no compulsory deposit, you may be tempted to borrow more than with other types of car finance.
- Being approved for a loan and receiving the funds can take time.
Buying a car on hire purchase (HP): Pros and cons
If you opt for hire purchase, you’ll generally be expected to pay a minimum of 10% of the vehicle’s value upfront, and you’ll then pay the remainder off over one to five years. The credit is secured against the car, so if you fail to keep up repayments you stand to lose the car.
Hire purchase agreements are normally arranged by the dealership. This means they’re quick and easy to sort out. However it also means that they tend to be more competitive when you’re buying one of their new cars, as opposed to a used car.
- Low deposit (as little as 10%).
- No restrictions on mileage.
- Quick and easy to arrange.
- Competitive rates on new cars.
- Choose the duration of the agreement (normally from one to five years).
- Usually requires a deposit (normally at least 10%).
- You don’t own the car until the final payment has been made.
- Tends to be less competitive for used cars.
Buying a car using personal contract purchase (PCP): Pros and cons
With personal contract purchase (PCP) you essentially take out a loan for the difference between the current value of the car, and the projected value of the car at the end of an agreed period (generally one to four years). You’ll may monthly payments, and then at the end of the agreed period you can make a balloon payment to purchase the car outright.
PCP’s are arranged so that at the end of the agreed period, the car should be worth a little more than the balloon payment you would have to make to buy it outright. You can’t claim this back as cash and walk away, however – at the end of the agreed period you have three options:
- Make a one-off balloon payment to purchase the car outright.
If you like the car and don’t want to switch, this could be a smart choice.
- Hand the car back and walk away.
If you can’t afford the balloon payment, and you’re not keen to enter into a new PCP this is probably what you’d do. If the value of the car has decreased more than expected, and it’s actually worth less than the projected amount, then provided this isn’t due to damage or excess mileage, you’d generally hand the car back and walk away.
- Trade the car in and enter into a new personal contract purchase.
This is a popular option if the car is worth more than the ballon payment you’d need to make to buy it outright. You can put this ‘equity’ towards a deposit on another PCP.
When you enter into a PCP, you’ll be asked what mileage you expect to clock up in the vehicle. It’s important to answer this honestly, otherwise you’ll find yourself in a weaker position at the end of the PCP. Bear in mind that if you damage the car or exceed the agreed mileage limit there will be charges to pay at the end of the agreed period.
The credit is secured against the car, so if you fail to keep up repayments you stand to lose the car.
- Low deposit (as little as 10%).
- Lower monthly payments than hire purchase.
- Choose the duration of the agreement (normally from one to four years).
- At the end of the PCP, you have a choice as to whether to buy, trade in or walk away.
- Usually requires a deposit (normally at least 10%).
- Restrictions on mileage.
- Excessive wear and tear or damage to the car will result in fees.
- You only own the car if you make a balloon payment at the end of the agreement.
With each option above, make sure to find out the early-repayment terms of the product that you’re considering.Back to top
Buying a car using a credit card: Pros and cons
If you’re approved for a credit limit that covers the purchase of the car you’re after, and you’ve compared credit cards to find a lengthy 0% on purchases deal, then using a credit card can be a smart way to buy a car. As an added bonus, credit card providers are obliged to give protection on credit card payments between £100 and £30,000.
The downside is that if you don’t pay off the debt within the 0% period, the rate is likely to revert to something far less competitive than than a standard loan. Because you’re only obliged to make the minimum monthly payment, you’ll want to work out how much you need to pay each month in order to clear the debt before any offer period on the card expires. Additionally, if you’re worried you’d be tempted to make further purchases on the card, then this might not be the smartest option for you.
- Credit card payment protection.
- Flexibility over monthly payment amounts (you’re only obliged to pay the specified minimum).
- Competitive rate (provided you shop around for the right card, then set yourself a repayment schedule and stick to it).
- Because you only have to make a minimum monthly payment, it could take longer to pay the debt off, and you could end up paying more in interest.
- Because the credit is open-ended, you may be tempted to make other additional purchases after the vehicle.
- Some dealerships will not accept credit card payment, or will only accept it up to a certain amount.
To get the best car loan, ask yourself:
- Am I eligible? There’s no point in applying for a loan if you don’t meet the lender’s minimum requirements. Find these requirements on the lender’s website or in online reviews.
- How much can I borrow? Does the lender offer loans that cover the total cost of a car you’re interested in — and can afford?
- Are the interest rates competitive? A high minimum advertised interest rate isn’t the best sign, and a refusal to disclose interest rates can be even worse. It could mean that rates are so high, the lenders would rather not advertise them.
- What are the fees? On top of dealership and state fees associated with buying a car, some lenders charge fees for taking out a loan.
- How long are the loan terms? Does your lender offer terms you can afford after you factor in APR and other costs involved in getting a new car?
- What’s the deposit? A 10% deposit is standard, but some lenders charge more. Go for a lender that offers a deposit that fits your budget.
- What are the early-repayment terms? Paying your loan off early you can save money on interest. However many lenders will charge a fee, for example one month’s interest, if you wish to repay your loan early.
- How’s its online reputation? Quickly scan online forums and review sites to see what people say about each lender. Are interest rates high? Do people have trouble making repayments? If anything sounds sneaky, run.
- What services does it offer? Some lenders hold your hand throughout the process of getting financing, and others don’t. Consider the help if you don’t know what you’re doing — but also ask: Is the lender genuinely helpful or just pushing you into partners’ laps.
- Vehicle preparation fee. Dealerships charge this fee to cover the cost of getting your car ready for you. You might not have to pay it, unless they’re going beyond a standard car wash.
- Documentation fee. Most dealers charge this fee to cover the cost of processing the paperwork that comes with your new car. Adding fees like these on as separate costs allows vendors to advertise cars at a lower price, but remember: you can always negotiate.
- Unnecessary accessories and extended warranties. Didn’t ask for that sound system or paint sealant? See an extra-long warranty in your contract? Unless you actually want it, tell your dealer that won’t pay for it.
Car finance from Zuto
- No broker fees
- Free car history and value check
- Buy any car from any dealer
Representative example: Representative 19.8% APR. Based on a loan of £5,500 over 4 years with monthly repayments of £163, a total cost of credit of £2,283 and a total amount repayable of £7,783.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.