Car finance is essentially a credit plan used for the purchase of a car. You pay off the value of your vehicle with monthly repayments, thus spreading the initial cost and making it easier to manage.
You'll generally pay back the cost of the car, plus interest and fees, in regular monthly instalments. The overal cost will depend on the type of car finance you choose - sometimes (as with a personal contract purchase) you won't even pay off the whole cost of the vehicle.
With an HP, you’ll hire the car from the finance company and pay off its cost (with interest) over a set period. You’ll need to pay a deposit for a hire purchase, typically worth around 10% of the car’s value. Unlike with a personal car loan, this debt is secured against the vehicle, which the finance company technically owns until you’ve paid off the balance – plus a small ‘option to purchase’ fee. Because the debt is secured, it’s less risky to the car finance provider than an unsecured loan, meaning that you are less likely to get turned down.
An unsecured personal loan is probably the most straightforward way of financing a car purchase. Quite simply, you borrow the money to buy the car and pay it back, with interest, over a set period – typically 1-5 years. Since you use this money to buy the car yourself, you’ll own it outright from the day of purchase.
Like with an HP, a personal contract purchase involves you paying an initial deposit, and then regular monthly instalments for a set period. But instead of paying off the cost of the car, with a PCP you’re just paying the depreciation – the difference between what the car is worth at the start of the contract and at the end. Once the contract is up, you’ll have the option to make what’s known as a ‘balloon payment’ to buy the car outright. It’s usually pretty expensive to buy the car at the end of the PCP either just return it or start a new PCP and get a different car.
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We spoke to 500 drivers about buying cars on finance, and here's what we found:
Only a quarter of people who took out a car finance deal used a price comparison site.
Despite this, almost 60% of those who didn't use a comparison site believe they could've found a better deal if they did.
People didn't understand all of the language & jargon
Found taking out a car finance plan stressful
Didn't know where to start looking for a finance plan
Don't know your hire purchase from your personal contract purchase? Confused about interest rates, fees, and balloon payments? We've got a selection of helpful guides to ensure that you're fully clued up before you take out a car finance deal. Visit our guide library to see if you can find the information you're looking for.
See our guidesArranging a finance plan to buy a new car can be confusing if you don't know where to look. Our advisors can help guide you through the process and make everything much easier. Fill in our short form letting us know a bit about what you want to borrow, and one of our advisors will be in touch to help you find the right plan.
Get a quote nowApplying for car finance through through Money Expert is easy. All you need to do is provide us with a few details about yourself and the car finance plan you're after, and you'll be shown some quotes.
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Get this information to hand, and then use our soft search eligiblilty checker to see what deals you could get without affecting your credit score.
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When paying for a car on finance, the total cost will depend on both the value of the vehicle and the interest your finance provider charges on your credit plan. There are a few different factors that will influence the price of the car finance plan you're offered:
One third of drivers find the process of researching and taking out a car finance plan overwhelming; with Money Expert's car finance comparison service we seek to take the stress away from drivers looking for an affordable deal on their next car.
The majority of people in the UK use some sort of car finance deal to buy their cars these days, but is it worth it? Using car finance to purchase a new vehicle can be a great way to get the car you want without stumping up the cash upfront. However, there are certain things to be aware of before you take out a car finance deal.
After buying a house, purchasing a car is one of the biggest expenditures most of us will make in our lives. Therefore, it's important to know exactly what you're getting into before getting into the details of a car finance plan.
Financing a car works similarly to taking out a secured loan. Pretty much any car finance deal will involve you paying monthly installments to your lender. While this can spread the initial cost of a new car over a number of years, you need to make sure your monthly repayments are affordable.
If you miss a payment, you could be hit with late payment fees and other charges which will only increase your debt. Missing payments can also negatively affect your credit score. Bad credit can affect your ability to access credit in the future, including other car finance deals and mortgages. Your car may also be repossessed, meaning all that money you've paid towards it will count for nothing.
This will depend on what you mean by ‘cheapest’. With a PCP you’re only paying for the depreciation and not the car itself. This means that you’ll pay less overall than you would with a hire purchase (assuming that the car costs the same amount). However, you won’t end up with a car at the end, unless you pay the balloon payment which is likely to spike the cost right up.
With both PCPs and hire purchases, you’ll have to pay a deposit. This will typically be around 10% of the vehicle cost but if can opt to pay more you’ll reduce your monthly payments.
Personal car loans won’t require a deposit.
Interest rates (or APR), tend to be broadly similar across all products – around 4-7% is typical – and will depend in part on your credit score.
Your credit rating will determine things like the APR of your finance plan and even whether or not you’re accepted in the first place. Although it’s unlikely you’ll be turned down entirely for having bad credit, it’s even less likely with PCPs or HPs as both are effectively secured loans. This means that if you default on payments, the car finance company will repossess the vehicle.
When the term of your personal contract purchase is up, you’ll have to hand the car back in the same condition you go it in or pay for any damage. You’ll also have to agree to a monthly or yearly mileage limit when you start your PCP and breaching it will jack up your monthly payments.
If you can’t keep up with your payments on a hire purchase or personal contract purchase agreement and have to default, then the car will be repossessed. If you default on a personal car loan, however, you’ll have to either try and arrange a debt management plan or declare insolvency with an IVA or bankruptcy agreement.