Funding a new car can be expensive, especially if you choose to pay upfront. But if you don’t have the cash saved to buy the car outright, there are several finance options available. That’s where car finance comes in. By using credit you can make your new wheels feel more affordable by spreading the cost into repayments.
Car finance is a catch-all term for a range of options that allow you to borrow the money you need to buy a new or second-hand car, or lease it for a period before having the option to buy it outright.
You only need car finance when you don’t have enough cash to pay the full price for the car you want.
There are several ways to finance a car purchase and they work in different ways, including:
While most car finance options will see you borrowing money from a lender to fund a new car, they all work in different ways. With this in mind, it’s important that you consider the ins and outs of each car finance option before going ahead with your choice.
You should be able to use any of these options to buy either a new car or one that’s been pre-owned, but always check with the dealer and the lender first.
If you can’t afford to buy a car outright, a car loan can be a cheaper way to borrow than other types of car finance. Using a loan to buy a car works like this...
Loans can be arranged quickly online through price comparison websites like MoneySuperMarket, or by phone, subject to credit checks. The better your credit score the better the rate you’ll be offered.
PCP can work out cheap at the outset, compared to other types of car finance, but it can prove more expensive overall if you want to own the car at the end of the contract. Here are the key features:
Hire purchase arrangements often cost you less up front, but they come with drawbacks. This is what you need to know:
Credit cards are another way to finance your new wheels. Using a credit card to buy a car works best as part of a cash purchase – if you buy a car entirely on credit, your repayments are likely to end up very high.
Another car finance option would be to lease your car using car finance. This means you hire a new car for several years, returning it at the end of the lease period (essentially a long-term car rental).
Also known as personal contract hire - like other hire purchase agreements, you’ll put a deposit down and make monthly repayments. You’ll also be able to add servicing plans to your deal – for an add-on cost, to ensure you hand the car back in good condition and avoid paying fines. The main difference is you won’t end up owning the car at the end of the deal and there is no opportunity to regain some of what you’ve spent on the car by reselling it (which you can do with a car loan, or PCP or HP if you pay for the car at the end of the deal).
If you can afford to, it can be better to buy a car with your own money. Borrowing money (whether that be a loan, PCP or HP) will cost you more in the long run through interest payments. If you don’t have all the money, it’s worth saving as much as you can for the same reason. The smaller the loan you take out, or the larger the deposit you can put down, the less you’ll pay overall.
One thing to consider however is the protection that comes from buying a car through PCP for example. Usually, you’ll be able to take the car back to the dealer if it’s faulty, with free repairs and servicing sometimes part of the deal. Make sure you check the small print of your car finance deal and what protection you’re entitled to beforehand.
A 0% APR finance deal means you’ll spread the cost of the car over a set period, making monthly repayments - but without being charged interest on top. You’ll essentially take out an interest-free loan. Dealerships and showrooms typically offer 0% finance, but it may mean you have less bargaining power on the purchase price of the vehicle. Do bear in mind that providers may look to make money elsewhere through other costs and fees, so the overall cost over the term is the same as it would be with interest added. You’ll usually need a strong credit history and rating to be approved.
What happens at the end of your car finance deal will depend on the type of car finance you have and the terms of the deal.
With hire purchase, you’re technically paying to hire the car and you’ll only own it after you’ve made the final payment (with any ‘option to purchase’ fees added on top).
Personal contract purchase (PCP) will give you the option to make a large final payment (known as a ‘balloon payment’) to keep the car, or you can return it and walk away, or take out a fresh PCP on a new set of wheels.
If you’re looking to own the vehicle straight away, taking out a personal loan may be your best car finance option. This way, you’ll own the car outright as you’ll use the proceeds of your loan advance to buy the car. You’ll then pay back the loan in monthly repayments to the lender – with interest added. Unlike HP or PCP, there’ll be no extra fees or charges to pay on top of the loan.
If you don’t have a credit history or have struggled with debt in the past leaving you with bad credit, you may be wondering what your options are when it comes to car finance.
When deciding whether to offer you a car loan, lenders will look at your credit score and how you’ve managed credit in the past. To put it simply, if your financial history is in good shape, you’ll have access to a greater choice of deals and lower interest rates. The same can apply for PCP and HP, where dealers may look at your credit history before accepting you for a deal.
That said, bad credit doesn’t have to be an instant ‘no’ when it comes to car finance. Here at MoneySuperMarket we work with specialists in car finance for bad credit, and may be able to match you with the right car loan.
Whether getting a car on finance is the right choice for you will depend on your personal, financial circumstances including your credit history. As with a loan, PCP and HP mean you’re borrowing money which needs to be paid back – so you’ll need to make sure you can afford to meet your repayments.
Buying a car through PCP or HP is a popular option, mostly because it makes financing a new car more affordable. Car finance lets you pay off your new wheels over a number of years and as long as you work out what you can afford to pay repayments wise, you’re likely to have a wider choice of cars to pick from than you would buying the car outright with cash.
Unsure about whether to take out a loan for your car? Our car loan calculator can give you a good idea of how much your loan will cost you, factoring in APR and the length of term to work out how much you’ll need to repay.
Other useful guides
MoneySuperMarket works with a wide range of personal loan providers. If you want to finance a car purchase, you can compare loans and sort them by size, duration and interest rate to find the right loan for your needs.
All you'll need to do is provide a few details about yourself, and from there we’ll perform what’s known as a soft credit check, which won’t harm your credit score. You’ll then be shown which loans you are most likely to be accepted for. This puts you in control before you apply for a loan.