Car finance

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**On average it can take less than 2 minutes to complete a car finance quote through Compare the Market based on data in November 2020.

What is car finance?

Car finance offers a way to help people buy cars that they couldn’t normally pay for up front. Car finance acts as a type of loan or credit, which allows you to borrow the amount you need to buy the car and then repay the amount (with interest) over an agreed period.

There are various options to choose from when comparing car loans, so we’ll help you understand what’s on offer.

What type of car finance should I choose?

When choosing between car finance options, it’s important to understand what options are available to you. There are several options to choose from to finance the purchase of a car, the best will depend on your individual needs and circumstances, which Compare the Market’s eligibility checker helps with:

  • Hire purchase (HP) - With this type of car financing, you spread monthly payments over a set period of time. Once you’ve made the last repayment, the car is yours to keep. This type of car finance is typically only an option when buying through a car dealer, however there are some exceptions.
  • Personal loans - A personal loan offers a fixed amount to borrow, over a fixed term and, usually, a fixed interest rate. You should know exactly what you’re getting with a personal loan, so you can plan your money and spending around it. Most lenders offer personal loans up to £25,000. Loan terms can vary between finance providers, but there’s flexibility in how long you can pay off your car finance. When choosing the loan term, decide how soon you can realistically pay the money back, without stretching yourself too thinly.

Other options, which are not available through Compare the Market, include:

  • Personal Contract Purchase (PCP) - This works very much like HP, but the finance is based on the car’s depreciation, rather than its total value. At the end of the term, you can pay off the remaining value of the car – you’ll hear this called the Guaranteed Minimum Future Value (GMFV) or balloon payment – and keep it. Alternatively, you can give the car back to the finance provider, or part exchange it using the equity you have in it as a deposit on your next car.
  • Personal contract hire (PCH) - Where you pay a monthly fee to rent the car and give it back at the end of a set period.
  • Logbook loans – A logbook loan is a type of secured loan, with the car acting as the collateral that the car loan is secured against.
  Hire purchase Personal loan Personal contract purchase Personal contract hire Logbook loan
Deposit required? Usually No Usually Usually No
Final balloon payment? No No Yes No No
Do you own the car? Yes (at the end) Yes Optional No Yes
Secured loan? Yes No Yes No Yes
Compare car finance

Why use car finance?

Using car finance is a popular way to buy a new or used car without paying for everything up front. You usually pay a deposit and the rest in monthly repayments over a fixed term.
 
You can usually choose how long you want to be paying off the car finance. That might be from one year through to five years. The length of the term will affect the fixed monthly payment you sign up to.
 
Make sure you never borrow more than you can afford to pay back.

And please note, you can only apply for car finance if you’re aged 18 and over.
 
One simple way of getting car finance is by comparing car finance options with Compare the Market. We can compare hire purchase agreements and personal loans, to find a deal that’s right for you.

Should I speak to my lender first?

Yes. If you want to make a partial overpayment, then a 28-day notice period applies. You’ll be charged interest on the full amount you owe for 28 days after you notify your lender of an extra payment.

If you want to pay your loan off in full, you’ll need to ask your lender for an ‘early settlement amount’, which is a recalculation of what you owe based on:

  • what you’ve already paid and the amount you still owe
  • what interest charges apply
  • whether there are any early payment fees.

Your lender’s obliged to give you this figure if you ask for it and to give you at least 28 days to think it over. If you decide to go ahead, you’ll need to pay the outstanding early settlement amount by the settlement date the lender has given you – otherwise it will need to be recalculated.

If you don’t ask the lender for the figure, you may end up paying the wrong amount.

You don’t have to pay off the loan if you decide you’d be better off continuing with your monthly instalments.

Car finance and credit scores

Car finance packages are a type of credit product, which means that your credit score and history will play a part in the type of deal you can get. If you have a good credit score, you might qualify for better interest rates (APR), longer loan terms and even higher borrowing limits. However, just because you can borrow more, doesn’t always mean you should. You need to be careful that you can realistically afford to repay the amount you owe, otherwise you could face significant penalty fees and risk getting into debt.

Can I get car finance with bad credit?

If you have a bad credit record, you might be worried that you won’t be able to get car finance. Although this can be challenging, we can help you compare car loans and finance packages to find the right fit for your financial situation.

If you haven’t yet built up a credit history yet, we can also help you build your credit score too.
 
Taking out car finance, or any other type of credit arrangement, and meeting all payment obligations, could also help you repair your credit report. If you make all your repayments on time, you’ll demonstrate that you’re capable of being responsible with money.

How much will a car loan cost?

It’s hard to say how much car loans will cost, because there are so many things that you need to factor in. If you’re looking for cheap car loans, here are some of the things that will decide how much your car loan will cost:

  • The amount you’re borrowing – simply put, the more you borrow, the more you’ll have to pay back.
  • The interest rate – again, the higher the interest rate (APR), the more you’ll pay in interest. This ties together with the amount you’re borrowing, because a higher interest rate on a higher borrowing amount will make it even more expensive. Normally, higher borrowing amounts attract lower rates, but this isn’t guaranteed. Check the representative APR when comparing car loans and finance but understand that this isn’t the exact rate that you could be offered. If there’s a ‘guaranteed APR’ listed, this is exactly what you’ll pay for your car loan.
  • The loan term – if you’re borrowing over a longer period, you’ll be paying more in interest over the full term. Longer terms can result in lower interest rates, but you’ll still be paying more overall. The best way to lower the overall cost is to pay off your loan as you realistically can.
  • Your credit score and history – if you have a bad credit score, you probably won’t qualify for the best interest rates. This can mean you’ll be paying back more in interest, making the overall cost of the loan more expensive.
  • Loan fees – these have many names like admin or arrangement fees, but you should check these carefully when comparing, as they can make a big difference when tallied up. These fees should be included in the APR listed, to make it easier for you when comparing loans.

If you keep these things in mind when you compare car loans, you should be able to find the best car loan for your needs.

How to get great-value car finance

Getting a great deal on your car finance with Compare the Market is easy. Just give us a few details and we’ll give you a quick decision, so you know how much you have to spend. We can compare multiple car finance options for you, including hire purchase agreements, personal loans and even credit cards.
 
We have a range of trusted lenders who can finance cars, motorcycles, vans and caravans and there are no broker fees.

What do I need to apply?

The documents you need can vary from lender to lender. But there are a few bits of paperwork that most car financing companies will want to see.

All lenders will want you to be able to prove that any personal details you’ve supplied are accurate. Expect to be asked to provide proof of address, a photo or scan of your driving licence and your contact details. To make sure you can afford the payments, the lender may need to see payslips or other proof of your annual income.

We’ll recommend the right lender for you, from our panel, then let you know exactly what’s required by them.

Why compare car finance through Compare the Market?

Get a decision in
minutes

Get a personal loan comparison in under 2 minutes**

All credit histories considered

No impact on your credit score when comparing

Wide range of products available

Choose between hire purchase, personal loan and credit card options

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

**On average it can take less than 2 minutes to complete a car finance quote through Compare the Market based on data in November 2020.

Frequently asked questions

Can I get finance for a used car?

Yes, you should be able to, although it depends on your own personal circumstances. Car finance isn’t just for new cars. Many people choose to finance buying a used car in the same way as they would a new one. We can search and compare hire purchase and personal loans for buying a used car.

Financing your car using a loan may help you to even out the cost - usually with a lower annual percentage rate and without having to secure the loan against an asset.

What happens if you fall behind with payments?

When choosing how to finance your car, it’s good to understand what happens should you fall behind with payments. With HP & PCP, the finance company could take the car back and use the proceeds to repay your debt.

With a personal loan or credit card, the lender will expect you to repay whatever you still owe. But you wouldn’t be under any obligation to sell your car.

As for a Personal Contract Hire, the clue is in the name. As you’re technically hiring the car over your contracted period, you’re never the owner. If you can’t keep up with your payments, you may be forced to pay penalty fees and also have the car taken away from you.

Do I need to know what car I want to buy?

Not necessarily. As long as you have your budget in mind, we can search and compare between our panel of lenders to find the right option to fund the car you go on to buy. However, for hire purchase loans you will need the vehicle’s registration number to complete the application (this doesn’t apply to personal loans).

What is APR?

APR stands for Annual Percentage Rate. This is the rate which determines the total cost of borrowing over the course of a year. This includes both the amount of interest and any fees that are part of the loan.

You’ve probably also seen the phrase “representative APR” across adverts and websites when various money products are advertised. The representative APR is used as an advertised rate, because it must be available to the majority (at least 51%) of successful applicants. The representative APR is used to give you an idea of what you can expect to pay back in interest, but you could also fall within the other 49% of applicants, who will usually be offered a higher interest rate. Of course, this comes down to your financial history and credit score.

Representative APR is a useful figure to use when comparing money products, but remember, just because you see an advertised “representative APR”, don’t assume you’ll get that same rate. You’ll find out what the ‘real’ APR is once you’ve applied for the loan yourself.

You might also see “guaranteed APR” next to certain money products. The difference between representative and guaranteed APR is that a guaranteed APR is more of a ‘what you see is what you get’ type deal.

Will I be charged a fee for organising car finance?

There are no fees or costs when you compare car finance and car loan options with us. Instead, we get a fee or commission from the lender for arranging your car finance with them. In some cases, car dealers or lenders may charge an administration fee. If this is the case, we will show this to you. 

Do I have to put down a deposit for my car finance?

It depends on which kind of car finance option you’re looking at. A hire purchase car loan usually requires a deposit, with the amount varying depending on the provider and the amount you’re borrowing. If you do need a deposit, increasing your deposit amount should reduce your monthly repayments.

If you chose a personal loan instead, you won’t need to worry about a deposit at all. As long as you can afford to keep up with the monthly repayments, this could get you on the road without having to save up for one.

Can I repay my car loan early?

Possibly, but it depends on your specific loan agreement. Most loan and car finance providers will include early repayment charges in your agreement, so you need to check these before you decide. The fees vary between providers, and you should always understand these fees before you take out the loan or finance package.

If you’re able to make overpayments each month, or pay off the whole amount early, this can be a great option, as you’ll no longer be paying the interest each month. Just make sure that it makes sense to you financially, once you’ve taken any early repayment fees into account.

Will a good credit score help me get car finance?

Yes, just like with any other type of loan, having a good credit score will help you get car finance, with the highest scores usually getting the best rates. However, just because you might have a bad credit score, it doesn’t mean you’ll automatically be rejected for a car loan. It just might mean that you’ll have to pay a higher interest rate. By using our comparison service, you’ll be able to compare the rates on offer to you and choose the right car finance quote from our selection.

Will applying impact my credit score?

Your initial comparison will let you see whether you’re eligible for finance, without impacting your credit score. This is because you’ll only face a ‘soft search’ when comparing. You’ll only face a hard credit check once you’ve decided to officially apply for the loan. Comparing loans with Compare the Market won’t require a hard credit check. Our comparison service only leaves a soft search, which isn’t visible to lenders and won’t affect your credit score in any way.

What is a soft search?

A ‘soft search’ is a type of credit check, one that doesn’t affect your credit score. When comparing quotes for money products or insurance, providers will do a soft search, which is used to check your details are accurate. This will only appear on your credit file to you and won’t impact your score. Compare the Market will never carry out a hard credit search when you compare loans with us.

Once you’ve compared and decide to then go with a particular provider and buy a product, then they’ll carry out a ‘hard search’, which will leave a mark on your credit record, and may impact your score.

What are the alternatives to car finance?

If you don’t think a dedicated car finance plan is right for you, here are some alternatives:

Secured loans
If you need to borrow larger amounts, perhaps for a high-end model, or you’ve had trouble being accepted for a personal loan in the past, a secured loan could boost your chances of getting the money you need for the car.

However, secured loans come with extra strings attached. To get one, you have to offer something valuable as collateral. A common example would be your home. This means that the loan provider owns the car until you’ve paid it off. The collateral is used to reassure the lender that their investment in you is less risky, because they’ll be able to repossess the collateral if you’re unable to keep up with your repayments.

This means you have to be very carefully when taking out a secured loan, as you could lose the collateral you used to get the loan. However, because of this, secured loans tend to offer higher borrowing amounts, lower interest rates and longer loan terms, which can help make the repayments manageable.

Credit cards
For a purchase as expensive as a car, you should only use a credit card if you have very few options, and you probably won’t be able to buy a very expensive model. However, a 0% purchase credit card can be a useful alternative to car finance, if you can pay it off quick enough.

Because you won’t be paying an interest, this can be an attractive alternative to a more traditional loan or finance agreement, but you’ll normally have to pay this off much sooner, to keep that 0% rate. You should also watch out for any agreed limits to your card, both for the 0% period, as well as the borrowing limit you can reach. If you break either of these limits, you’ll probably lose your 0% rate, and you could suddenly find yourself being charged a significant amount in interest.

Daniel Hutson

From the Motor team

“Car finance can be complicated, but we can do most of the legwork for you by comparing multiple car finance options in minutes. By using our comparison service, you have the chance to get on the road in the car you want, with financing deals that could be right for you.
 
“Be sure to compare a few options as you’ll need to understand the total amount you’ll pay, and whether the monthly repayments will be affordable for you.”