Everything you need to know about car finance

Whether you’re buying your car outright with cash, or buying it on finance, there are lots of different options potentially available so it’s important to make sure you choose the route that’s right for you.

You also need to consider the monthly repayment amounts, interest rates offered, the running costs and what you might do with your car in the future. 

All these different options may be confusing, and it’s hard to know whether you’re getting a good deal and what the best option for you is.

You need to understand how and when you’ll pay, the positives and negatives of each potential option and whether you could save money by choosing something different to what you might be leaning towards. 

We break down the basics of just some of the options, and answer a few key questions.

What is Personal Contract Purchase (PCP)?

A PCP is reported to be how more than half of us finance our new cars, according to figures from Experian. With a PCP deal you don’t make repayments on the full value of the car, this can mean that the monthly repayments are lower than some of the other options. However, at the end of the finance you will be left with a large payment known as the guaranteed future value (GFV) or balloon payment to pay if you wish to own the car. Or, you can return the car.

The GFV or balloon payment is the amount of the vehicle value that the finance lender off-sets to the end of the finance term, based on its anticipated age and mileage.   

 If you hand the car back and decide to take out finance for your next car, you may need to find another deposit.

When you take out a PCP you will need to agree a maximum annual mileage with the lender. The amount of miles can affect the cost of your PCP deal, so you might be tempted to list a lower mileage than you’re likely to do. However, if you exceed the mileage agreed and decide to hand the car back then you will be liable to cover the cost of the additional mileage used, which could end up being quite costly.

It’s important to be aware too, that you may be liable to pay for any damage to the car at the end of your contract. If the car has any scrapes or bumps – something that would be more than just general wear and tear for its age and mileage – you will be asked to pay for repair and the cost may be more than you expect.

PCP is mostly offered on brand new cars, but is available for used cars too dependent on the age of the car. Admiral Loans only offer PCP on used cars.

Bear in mind that your loan is secured against the car, so falling behind on payments could mean that the vehicle is repossessed by the lender.

What is Hire Purchase (HP)?

Hire Purchase is an agreement whereby you hire the vehicle for a period of time by paying monthly instalments. At the end of the finance term you have the option to buy the car by paying the ‘option to purchase’ fee, which is normally included in your last monthly instalment.

With Hire Purchase you normally have to put down a deposit – usually at least 10%, – and pay off the remaining amount as a fixed monthly payment over an agreed period of time.

Unlike a PCP, there is no mileage limit on a HP contract.

As with PCP, the loan is secured against the car so falling behind on payments could lead to the vehicle being repossessed.

What is Personal Hire Contract (PCH)?

Personal Hire Contract is a long-term lease agreement, where you make payments for the car and then give it back at the end of the contract.

Maintenance costs are often included, but you might have to put down a large ‘initial rental’ that you won’t get back, like a deposit. MOT, insurance and tax can also be included in the payment which makes things easier but can mean you have a more expensive monthly repayment.

Personal loans

Taking out an unsecured personal loan to buy your car could be a cost-effective way to fund your exciting new purchase, depending on the cost of your car, as you may find that you can get lower interest rates. Bear in mind that most personal loans are limited to a maximum of £25,000.

This is dependent on a successful credit check. If you don’t have a good credit score, you may find yourself unable to access the more competitive APRs on personal loans.

It’s important to note that when you compare the Representative APRs, this is the rate at least 51% of customers will be offered. This means some customers will be offered a higher or lower APR than the Representative APR advertised and is dependent on the amount applied for and your individual circumstances.

Credit cards

Dependent on the cost of the vehicle, a 0% credit card could be one of the more cost-effective options and it will give you extra protection if something goes wrong, as long as you pay at least £100 of it by card and meet your monthly card payments. 

The 0% offer is usually for a limited period, so as well as factoring in if you can meet the minimum monthly payment amount required you will need  to be able to pay the full amount off by the time the 0% offer runs out or you will find yourself paying much higher rates of interest.

Remember however that you might not be able to access some of the best credit card deals available unless you have a good credit score.

Paying in cash

Before you start looking for a new car, consider your finances and see whether you could afford to pay for a car outright. Coughing up cash for your new motor is by far the easiest way to pay, but may not be achievable for lots of people.

Can I afford car finance?

This is the most important consideration to make, and something you must be happy with before signing on the dotted line. Make sure the loan is affordable for you, and that you can still afford all your other existing commitments and essentials like your mortgage, bills and cost of living. Think about whether your financial circumstances may change in the future, and whether you’ll be able to afford the repayments then.

If you’re worried that you might be getting into financial difficulties, contact the Citizens Advice Bureau– they’ll be able to give you the right advice for your circumstances.

Visit Admiral Car Finance and use our car finance calculator to find out more.