Tackling your car finance questions
Working out how to pay for a car may seem a bit overwhelming at first. Break it down by reading through the most commonly asked questions about car finance
Do I need a deposit to buy a new car?
Typically, if you’re considering a car finance deal, you’re likely to need a deposit of 10% to 20%. With a bigger deposit, you can borrow less, pay less or even get 0% interest for the privilege.
On the flip side, if you raise the whole cash amount using a personal loan or credit card, you might not need a deposit at all.
How much money can I borrow to buy a car?
If you use a personal loan or credit card, the amount you can borrow will depend on the agreement you have with your provider, and your own financial situation – your income, outgoings and credit score.
If the financing is secured against the car, the amount you can borrow will also depend on the value of the vehicle.
How can I tackle car finance with a lower credit score?
With a less-than-sparkling credit history, you may still be able to borrow, but at higher interest rates. Consider raising a larger deposit, and buying a cheaper car, so you will only need to apply for a smaller loan. This can help keep the payments more manageable.
You may also have a better chance of getting approved if you can show a regular income and the debt is secured against the car.
Is it ‘normal’ to borrow money to buy a car?
Simply put, yes it is.
More than 80% of brand new car purchases involve some borrowing.
How long do car finance deals last?
Typical car finance deals tend to last for one to three years, although hire purchase payments might be spread over up to five years.
Borrowing money for longer might be tempting because it makes your monthly payments lower. However, with a longer loan you will also pay more interest in total. For example:
- If you borrowed £10,000 at 4% over three years, your monthly payments would be £295 and you would pay a total of £617 in interest.
- Stretch the same loan over five years, and although your monthly payments would drop to £184, the total interest would shoot up to £1,031.
Again, if you’d like to cut the monthly costs, it could well be worth choosing a cheaper car, so you only need to borrow a smaller sum.
Do I have to get a finance package from the dealer that sells me the car?
No, not necessarily. It’s worth comparing ways to borrow, and getting different quotes. Remember, the dealer will usually get commission from the finance company. This means if you opt for dealer finance, you may be able to haggle about different interest rates, discounts and extras like insurance, warranties and service agreements. With finance from a car manufacturer, you may even be able to get 0% deals and contributions towards the deposit.
In contrast, if you pay cash or borrow elsewhere, you’ll have less chance to haggle, so weigh up the total package.
How can I compare different deals?
When comparing borrowing the same amount for the same time, the key figure to consider is the annual percentage rate (APR), which is the interest you will pay when borrowing money for a year. Car dealers may focus on the monthly repayments, but it’s also important to consider the length of the finance package, the total you will pay overall, and any extra fees and charges. If you ask for quotes in writing, you can go away and compare the terms and conditions.
What are the different types of car finance?
Unless you can pay in cash, there are two routes you can go down to finance a car:
1) General borrowing
Like any big purchase, you could use a personal loan or look out for a low interest or interest-free credit card deal.
2) Specialist car finance plans
The 3 plans specifically designed for financing a car (these are the ones you will get offered in a dealership) are:
- Hire purchase (HP)
- Personal contract plan - known as a personal contract purchase (PCP)
- Leasing a car - called personal contract hire (PCH).
You can find out which car finance options are most suited to you on the personalised Offers page of your free ClearScore account.
What’s the difference between HP, PCP and PCH?
HP, PCP and PCH all involve making monthly payments.
One big difference comes at the end of the contract. With HP, you own the car.
With leasing or PCH, you never own the car, but just choose whether to hand it back or swap to a new deal on a new car.
With PCP, you get all three options. In addition to handing the car back or swapping to a new deal, you can pay a lump sum or “balloon payment” to keep the car.
PCP and PCH may involve lower monthly payments than HP, because you’re not covering the whole value of the car. However, you’ll also need to keep the car in good condition, and avoid driving more than the agreed mileage, or face extra charges at the end of the deal.
Why should I care whether I own the car or not?
During finance options like HP, PCP and PCH, the car still belongs to the lender (normally the car dealer). This means that if you fall behind with the payments, you can’t just sell the car to raise extra cash, and the lender could come and take it away.
In practice, if the car has a good resale value and you’re not planning on selling it any time soon, you may well be better off buying it. If you pay in cash, with a personal loan or credit card, you’ll own it straight away. With hire purchase, you’ll own it after the final payment.
If the car is likely to plummet in value, and you’re keen to switch cars every few years, it’s worth checking out PCP or PCH (leasing).
A final checklist
Do want to make sure you’ve thought things through? We’ve put together a list of questions you may want to ask yourself before you commit to a new set of wheels.
- How much do you need to borrow and for how long?
- How much can you raise as a deposit, or when trading in your current car?
- What interest rate (APR) will you be charged on different deals?
- Do you mind whether you own the car or not?
- Are you willing to keep the car in good condition and below an agreed mileage?
- Have you weighed up different ways to raise the money from different sources?
- If you opt for finance from a car dealer, can you negotiate to get lower interest rates, discounts or other extras thrown in?
- Do you plan to hang on to your car, or prefer changing your car every few years?
- Is the car you’re considering likely to plummet in price, or hold its value?