Ten things you need to know about car finance
Approximately four out of every five new cars in the UK are ‘bought’ using finance, rather than being purchased outright. With 2.5. million new car registrations last year, that means 2 million of them are obtained by people paying monthly installments.
Despite the remarkable rise of car finance in the past few years, a lot of motorists still don’t know the ins and outs of car finance – and how they can get the best deal.
If you are one of the many drivers considering buying a new or used car on finance, we’ve put together the top ten things you need to know before you commit…
What are the different types of car finance?
You will usually find there are two main types of car finance available: Personal Contract Purchase (PCP) and Hire Purchase (HP).
PCP deals usually require you to pay a deposit and then small monthly payments over several years – commonly between two to five years. PCP offers small monthly costs, but there is a ‘balloon’ payment at the end of the agreement that you will need to pay if you wish to keep the car – which is often worth thousands of pounds.
This final payment is calculated using the estimated value of the car that the finance provider predicted at the start of the agreement, meaning you are basically paying off the depreciation of the car’s value over time. If you don’t want to keep the car once your finance deal is over, you can just hand it back to the provider without paying the final ‘balloon’ payment.
Hire Purchase deals are simpler, in that you pay a deposit and then a higher monthly payment to cover the full cost of the vehicle. There can be a purchase fee at the end for you to pay to keep the car, but it is often significantly less that it would be under a PCP – sometimes just a token payment of £1.
Do I have to get car finance directly from the dealer?
One of the most common misconceptions about car finance is that you can only agree to take on finance deals provided by the dealership that is selling the car.
As customers think this is the only option available to them, they miss out on car finance deals that are work out to be cheaper by taking out an agreement directly with a dealer.
As a customer you are free to shop around for finance deals and get quotes before you even step foot in a car showroom – so don’t fall for the hard-sell when you’re in there.
Do car finance quotes affect my credit score?
If you make a full application for car finance from a lot of different providers in a short period of time, then this can have an impact on your credit score.
If you are shopping around and looking for the best deal, then you should just get quotes that use ‘soft credit searches’ first, until you’re sure about the one you want to fully apply for. Once you start the application process you will incur a ‘hard’ credit check against your credit rating.
Will having car finance affect my credit rating?
Car finance is treated like any other loan, so any missed or late payments could impact your credit score and make you appear a higher risk to other lenders. That’s why it is important to only choose a deal you can afford and make sure you make your monthly payments on time.
On the flip side, if you make your repayments on time it can actually improve your credit score as other lenders will see that you are a lower risk.
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Can I pay off my finance agreement early?
All car finance agreements allow you to pay the outstanding balance in full at any time, and no lender can refuse this.
As with other types of loans and finance though, you may incur some ‘early payment’ charges – which will depend on the individual lender – so it’s best to check what these are before you sign anything.
Can I get a PCP deal for a used car?
It used to be the PCP – Personal Contract Hire – deals were only available on new cars, as they were designed as a way for drivers to pay for a new car per month and then pay to own it outright at the end of the agreement.
However, there are a growing number of providers that now offer PCP deals for second-hand cars – offering greater flexibility on the type of car you can get on finance.
Do I have to pay a deposit on car finance?
Deposits are commonly used by car finance providers to make sure customers borrow a sensible amount relative to the car’s value, and to reduce the chances of negative equity caused be depreciation. However, 0 deposit car finance deals are becoming more popular as car manufacturers use it to attract new sales.
Will I get my deposit back at the end of a PCP agreement?
You are not entitled to any money back if you decide to hand your car back at the end of your PCP arrangement, which includes the deposit.
However, if you paid quite a big deposit at the outset and the car has depreciated slower than the finance provider predicted then the car could be worth more than the final balloon payment you have to pay to keep it.
In that scenario you could be better off paying the final payment, keeping the car and then selling it privately to make a bit of profit.
That’s not an easy situation to predict though, so it’s best not to undertake a PCP agreement trying to second guess how much a car is likely to depreciate – just stick to finding the best deal for your budget.
How fast can I get approved for car finance?
There are some finance providers and car dealers that require written personal details from you before offering a deal, which can take weeks to all go through.
But these days there are a lot of providers who do it all online, which can significantly speed up the whole process. It’s now possible to get a quite from an online provider in less than five minutes, and then continue with the full application in the same amount of time.
Can I cancel my car finance agreement?
You can opt out of your finance agreement, but only when you’ve paid off at least half of the value of the total loan.
This is called a Voluntary Termination (VT), and it means the car is handed back to the lender without you incurring any extra fees and not impacting your credit score.
If you do cancel your agreement though, a VT mark against your file could mean finance providers will be less likely to offer you a deal in the future. Therefore you should only consider a VT as a last resort, and only take out finance you can afford for the full term.
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