Car finance

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**On average it can take less than 3 minutes to complete a car finance quote through Compare the Market based on data in March 2022.

How does car finance work?

Car finance offers a way to help people buy cars that they couldn’t normally pay for up front. Typically, you’ll pay a deposit, then the rest in monthly repayments (with interest) over a fixed term. This could be from one year up to five years. The length of the term you choose will determine how much your monthly repayments are. A longer term means lower monthly repayments, however, it could cost you more in the long run as you’ll be paying more interest overall.

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

Why compare car finance through Compare the Market?

Get a decision in
minutes

Get a personal loan comparison in under 3 minutes**

All credit histories considered

No impact on your credit score when comparing

Wide range of products available

Choose between hire purchase and personal loan

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 3 minutes to complete a car finance quote through Compare the Market based on data in March 2022.

What types of car finance are there?

When choosing between car finance options, it’s important to understand what options are available to you. There are several choices to choose from to finance the purchase of a car, with suitability depending 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) – a type of loan based on the car’s depreciation rather than its total value.
  • Personal contract hire (PCH) – pay a monthly fee to rent the car, then return it at the end of the agreement period.
  • Logbook loans – a type of secured loan using the car as collateral.
Car finance calculator

How much does car financing cost?

It’s hard to say how much car finance loans will cost because there are many different factors. If you’re looking for cheap car financing, here’s what will determine the 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 difference between representative and guaranteed APR is that a guaranteed APR is more of a ‘what you see is what you get’ type deal.
  • The loan term – if you’re borrowing over a longer period, you’ll be paying more in interest over the full term. Longer terms could 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 soon 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 could mean you’ll be paying back more in interest, making the overall cost of the loan more expensive.
  • Loan fees – these have many names, such as 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.

The following tables give you a rough idea of the difference in car finance costs for fixed term periods of three and five years:

Three-year fixed term:
Representative example^ Hire Purchase Personal Loan
Car price £15,000 £15,000
Deposit £15,000 n/a
Total borrowing price for car £14,000 £15,000
Representative APR^^ 7.9% 3.4%
Monthly cost £436.31 £438.52
Total cost £15,707.09 £15,786.84

Five-year fixed term: 

Representative example^ Hire Purchase Personal Loan
Car price £15,000 £15,000
Deposit £1,000 n/a
Total borrowing price for car £14,000 £15,000
Representative APR^^ 7.9% 3.4%
Monthly cost £281.38 £271.86
Total cost £16,882.86 £16,311.43

^Figures are for illustrative purposes only and assume a perfect credit rating.
^^The actual APR you’re offered may differ.

Why it’s important to consider how much money you need

Knowing how much you need to borrow will help you decide where best to find that extra cash injection.

  • If you only need to borrow a small amount of money for a very short time, consider using your interest-free overdraft, if you have one. If not, it could be worth looking at different current accounts that offer this facility.
  • Credit cards with 0% interest purchases could be worth considering, particularly if you need to buy something specific. As long as you pay back what you owe within the interest-free period (and make at least the minimum monthly payments on time), you can rest in the knowledge that the credit hasn’t cost you a single penny extra.

If you need a larger sum of money, a personal loan could be the best answer. You can usually opt to borrow a minimum of £1,000, with upper limits depending on the lender. Most will lend you up to £25,000, although some may go as high as £50,000. 

The best APRs (annual percentage rate – this is the amount of interest, plus any fees, you pay on top of your loan) are reserved for customers with the best credit ratings. That’s why when you apply for a loan, you need to know that the APR you see might not be the one you get, unless it’s labelled as a guaranteed APR.

Can I get car finance with bad credit?

If you have a bad credit record, you may 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 a good 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 improve your credit report. If you make all your repayments on time, you’ll demonstrate that you’re capable of being responsible with money.

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.

What do I need to apply?

The documents you need can vary from lender to lender. But there’s 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.

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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.

 

What happens if you fall behind with payments?

With HP and 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, if you can’t keep up with your payments, you may be forced to pay penalty fees and may 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).

Will I be charged a fee for organising car finance?

No, 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 choose 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.

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.

Can I sell a car on finance?

No, it’s illegal to knowingly sell a car with outstanding finance still on it. Simply put – the car isn’t yours to sell. You can only sell the car once your finance contract comes to an end, or if you settle the outstanding finance first. 

It might be possible to part-exchange your financed car with another one, but this could be a costly option. Usually, the dealer will ask for a settlement figure from your finance company and this will be deducted from the value of the car you’re part-exchanging. If you were in the early stages of your finance agreement and your car has depreciated, you could end up owing far more than your new car is worth.

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. A more in-depth hard credit check is only carried out once you decide 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 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.

You should be very careful 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 could help make the repayments more 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 could be a useful alternative to car finance if you can pay it off quick enough.

Because you won’t be paying any interest, this could 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.

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