How car finance works


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What is car finance and how does it work?

Car finance simply makes the entire process of buying a car much easier, as you won’t have to part with a lump sum of cash before you get behind the wheel. Purchasing a car on finance acts essentially means getting a loan for the car, which you can then pay back in affordable, fixed instalments each month. This allows you to control your finances by making it easier to budget.

Hire purchase (HP) and personal contract purchase (PCP) are the most common forms of car finance agreements, along with guarantor and personal loans. However, there are other options available, such as self-employed finance and no-deposit finance, all of which can go some way towards making it easier for you to find the one that suits your unique needs.

It’s important to research the different options available to you when picking a car finance scheme, and make sure that you choose the best, most affordable option for your needs.

Is it better to buy or finance a car?

In previous years, it was better to buy a car outright, but that’s no longer the case. The increasing cost of living means that fewer people are able to afford to pay for a car in full and still remain financially stable. Opting into a car finance program is a more affordable option, as it allows you to spread the overall cost over several monthly instalments.

Do you pay more when you finance a car?

How much you will need to repay when financing a car depends on various factors, such as how much money you borrowed and what type of contract it was loaned under. For example, under an HP agreement, the amount borrowed is based on the car’s retail value at the start of the contract. If the cost depreciates significantly, you’ll still need to continue paying back on the full amount agreed upon when you began the plan.

A PCP agreement works in a similar way in that your ownership of the car is delayed until the end of the contract. However, the overall loan is calculated based on its guaranteed future value, which means you only borrow the difference between what the car is worth at the start of your agreement and what it will be at the end. By doing this, your repayments will typically be cheaper than other options. This agreement also gives you the option to upgrade your car with the dealer and take out a new contract.

Does my credit score affect car finance?

Credit scores are important when getting any form of a loan, including your potential to be approved for car finance. Having a higher credit score increases your chances of success when applying for any loan, so you should bear this in mind when applying for finance. There are ways you can improve your credit score, including ensuring your credit report is up to date, and paying off any outstanding debts.

Even if you don’t have the best credit score, you may still be eligible for a loan. Our team are experts at securing car finance with bad credit, and can help you on your journey towards getting your dream car. This includes CCJs, late payments, mortgage arrears, and other situations that may initially deter lenders.

Can you pay off a car loan early?

This largely depends on your own finances and whether you can afford to make larger repayments. However, you should check the details in your own contract, as some companies will charge you early repayment fees if you pay off the full loan before your contract ends. This is generally calculated based on two months’ worth of interest that the lender would have otherwise lost out on. However, this can vary from company to company, so it’s important to check.

What happens if I’ve been refused car finance?

Regardless of why you’ve been refused for car finance in the past, there are still options available to help you afford a vehicle. In the event that lenders are cautious of your credit history, or you have found yourself unable to afford the deposit required for your initial loan enquiry, there are still other finance options available. A no deposit loan, for example, may require higher monthly repayments, but it can still help you secure the vehicle you want.

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