How Does Used Car Finance Work?

Used car finance simplifies the process of buying a car by allowing you to spread the cost over time, instead of paying the full amount upfront. This makes owning a car more accessible for many by lowering the upfront cost.. Here’s a breakdown of how used car finance works.

Used Car Finance Options

Hire Purchase (HP)

• Overview: This is a straightforward finance option where you pay an initial deposit or choose a 0% deposit, followed by fixed monthly instalments over a period, typically between 3 to 5 years. You own the car outright after the last payment
• Benefits: The monthly payments are fixed, making budgeting easier. There are no mileage restrictions, which differs from some other finance types.
• Considerations: With HP, you are financing the full price of the vehicle, so monthly payments are generally higher than those with PCP. Additionally, because you are paying for the entire value of the car, if you choose to sell the vehicle you could find that you are owing more than the vehicle is worth, particularly if the vehicle depreciates faster than expected. If you stop paying before the end of the term, the car may be repossessed.

Personal Contract Purchase (PCP)

• Overview: Personal Contract Purchase (PCP) is a flexible car finance option that allows you to make lower monthly payments by deferring part of the cost to the end of the agreement. This is often referred to as the ‘balloon’ payment, which is a larger lump sum than your usual monthly payments.
• Benefits: Lower monthly payments and flexibility at the end of the agreement.
• Considerations: If you decide not to pay the balloon payment at the end of the term, you will not own the car, and returning it might involve extra charges if you exceed the mileage limit or if there's excessive wear and tear.

        End of Agreement Options:

1. Pay the Balloon Payment: If you want to keep the car, you can pay a larger final balloon payment.
2. Return the Vehicle: You can return the vehicle to the lender, but you may face additional charges if you exceed the agreed mileage or if there’s excessive wear and tear.
3. Part Exchange: Alternatively, you may part-exchange the vehicle. If the car's market value at the end of the agreement is greater than its predicted future value, you can use the difference as a deposit towards another vehicle.

Personal Loan

• Overview: Typically obtained from a bank, a personal loan grants you the funds to purchase the car outright, and you pay back the loan in instalments.
• Benefits: No deposit is required and there are no restrictions on mileage or how you use the car. However, this might not be the best option if you have a less-than-perfect credit score, as it is unsecured and your assets could be at risk if you fail to make payments.
• Considerations:  Since you own the car outright from the start, its value will depreciate over time, which could leave you owing more on the loan than the car is worth if you sell it early. Additionally, interest rates on personal loans can vary, potentially making it more expensive depending on your credit score.

Choosing the Right Option

The choice between these finance options depends largely on your financial situation and how long you intend to keep the vehicle. HP is ideal if you want to own your car outright at the end of the finance term without a large final payment. PCP might suit you better if you appreciate flexibility and want lower monthly payments, with the option to change cars regularly.

Benefits of Used Car Finance

• Affordable Payments: Spreads the cost over time, making higher-spec models more accessible without a hefty upfront payment.
• Flexible Terms: Offers options like HP and PCP, providing end-of-term choices to return, keep, or exchange the car.
• Risk Reduction: Includes regulated protections not typically available through private sales, safeguarding against unexpected expenses.
• Credit Building: Regular, successful payments can improve your credit score, enhancing eligibility for future loans.
• Access to Better Cars: Enables the purchase of more expensive and higher-spec cars than might be possible with outright buying.

Considerations of Used Car Finance

• Interest Costs: While monthly payments may be more affordable, you’ll likely pay more in total due to interest over the term of the finance agreement.
• Potential for Negative Equity: If you finance a car with a high depreciation rate, you could end up owing more than the car is worth, especially if you want to trade it in early.
• Commitment: Finance agreements often come with long-term commitments, so before committing to a finance option, ensure that the monthly payments will remain affordable for you even if your circumstances change, such as through job loss or increased living expenses
• Credit Requirements: Not everyone will qualify for the best rates or terms, and a poor credit score could result in higher interest rates or declined applications.
• Restrictions on Usage (for PCP): With options like PCP, there may be mileage limits and charges for wear and tear, reducing flexibility if your driving habits change.

Understanding the details of each finance option will help you make an informed decision that aligns with your financial goals and lifestyle needs. Whether you opt for HP, PCP, or a personal loan, Cargiant provides the support and tools to guide you through the process, ensuring you find the right car with the best finance option available.