Used Car Finance Explained
Car finance can seem daunting for anyone new to the subject but it doesn’t need to be. This guide will help provide you with an understanding of the car finance options available, leaving you more than equipped to find the best car finance deal.
If you’re still looking for the perfect used car to finance, why not take a look at our most popular car recommendations to give you some inspiration.
Car finance explained
For most people buying a car is the second most expensive purchase they will make in their lifetime, so it’s no surprise that over 80% of purchases are made with the help of finance.
This is because car finance helps spread the cost of the car you want over a number of years rather than paying it all up front.
There are a number of different finance options and the right one for you often comes down to personal preference and circumstances.
How does finance work on a car?
When you take finance out on a car, you’re essentially borrowing money from a lender who pays the cost of the car for you, which you then pay it back over an agreed period.
How much you pay per month is usually affected by the contract length and how much you pay upfront – the longer the contract and the more you put down as a deposit, the lower you monthly repayments will be. The amount you pay each month will be calculated upfront and the interest rate is usually fixed for the lifetime of the finance you take out.
Some finance options, such as hire purchase, secure the loan against your car so only the car can be repossessed in the event of a default on payments, whereas a personal loan is unsecured and your other assets could be at risk. Below we go into further detail of your car finance options.
What are my used car financing options?
If you’re prepared to put in the leg work, financing your car through a traditional loan car can be worthwhile. Not only do you not have to pay a deposit, you will own the car from the outset and have no mileage restrictions.
On the downside, the monthly repayments are likely to be higher and you’ll need to shop around to make sure you get the best deal. It also relies on you having a good credit rating in comparison to other car finance options. And as a personal loan is unsecured, your assets could be seized if you don’t keep up with payments.
Additionally, although you will own the car from the outset, you won’t benefit from some of the cover you might receive if you finance your car through alternative methods.
Hire purchase is one of the most popular options for car buyers today, it’s also the most straightforward to arrange.
After paying a deposit (usually around 10% of the car’s value), a finance company will then loan you the rest of the money which you pay this back through fixed monthly instalments over an agreed period, usually 3-5 years.
The advantage of HP is you can choose the agreement length, you know the exact amount you’ll have to pay each month and there’s no mileage limits. And although you do not legally own the car until the final payment, because the loan is secured against the vehicle, it won’t affect your other credit needs.
This is a bit like when you hire a car on holiday – you pay a deposit and a fixed amount each month to hire the car, and at the end of the contract you hand it back.
The payments tend to be lower than with other types of car finance, but you’ll have mileage restrictions and there may be penalties for excessive wear and tear.
If this trade-off sounds attractive, there are two types of car leasing – Personal Contract Purchase (PCP) and Personal Contract Hire (PCH).
The main difference between the two is that with PCP you can buy the car outright at the end of the contract by paying a lump sum, often known as a ’balloon payment’. If you choose not to, you simply hand the car back to the lender.
Whereas with PCH leasing, you never own the car or have the option to buy it but it’s easier to change cars and so suits people who like to swap cars frequently.
How do I finance a car?
This depends on which finance option you are planning to buy the car with. If it’s a personal loan then you’ll need to go to a bank or building society and get it sorted out separately to buying the car.
On the other hand, hire purchase and car leasing usually can be arranged through the car dealership you’re buying the car from, with the benefit of them helping you through the process.
Car finance calculator
When comparing finance deals, it’s important to calculate how much you will be paying each month to make sure you can afford it. Also, some deals may look attractive because they have a low interest rate but this will most likely mean a higher payment at the start or a balloon payment at the end. And don’t get caught out by mileage charges – these can quickly ramp up the costs of a finance deal and make it more expensive than other deals.
How do payments on a car work?
Once you find the right car, knowing exactly how payments work can be a challenge. We make it easy for you to understand by having an expert team of finance advisors who can walk you through every single step.
As part of the finance approval process, we work out the right monthly payment amount that suits your budget. We will even help you to schedule the payment date to one that’s convenient for you, so you can manage it around other payments you might have.
How do I get the best car finance deal?
Now that you know how finance works, the next thing is to find the best place to find a car on finance.
At Cargiant we’ve made it pretty easy: we have a huge range of cars to pick from, all at great prices and our finance experts are on hand to help you with any finance questions you may have.
What’s more, our finance partners are trusted names, including Barclays, Blackhorse and Moto Novo, so all you have to do now is find the right time to come in.