How to Get the Best Car Finance?

Which is better for you - a personal loan, PCP, or hire purchase?

Updated: May 18, 2024
Matt Crabtree

Written By

Matt Crabtree

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We'll help you make an informed decision about auto financing by outlining the various plans available to you.

Choosing a vehicle isn't a walk in the park. There are a variety of ways to pay for it, including direct purchase and financing. It's important to factor in maintenance expenditures as well. The cost of this may even rival that of your first house.

So, let’s help you to choose the method of car financing that best suits you.

Car financing overview

Almost every dealership, broker, or store dedicated to selling vehicles will try to sell you on some kind of financing plan when you go to make a purchase. 

Before you sign anything, we'll go through the many financing plans available, how to decipher your payment choices, the benefits of each, and what you need to know.

Credit cards, personal loans, and other forms of independent borrowing may be more affordable and more suited to your needs than dealer financing. To help you make the most informed choice possible, we consider all of your available alternatives.

Checking your credit rating…

You will likely need some kind of auto financing or consumer credit if you are not paying for your vehicle outright. Having a high credit score will allow you to take advantage of the greatest financing options. 

These websites will provide you with a free credit report and score:

  • Credit Club from MoneySavingExpert
  • Credit Query
  • ClearScore

Even though you have a high credit score and can borrow a higher sum of money, it doesn't imply you should. You should know for sure that you can afford to make all of the payments on the credit agreement for the whole duration of the arrangement by calculating all of your outgoings.

Get in touch with your auto loan service or lender immediately if you fall behind on payments. It's possible you may give the car back and get out of the debt early.

How to get the Best Car Finance?

Without further ado, let’s start with the simplest, old-fashioned way of financing a new car. 

1. With cash

Putting down all or a large chunk of cash for a vehicle is the simplest and least complicated approach to making the purchase.

If you can afford to pay the whole sum upfront, you will own the vehicle free and clear.

During the term of a personal contract purchase (PCP) or personal contract hire (PCH) arrangement, the financial company acts as the legal owner of the vehicle you are financing. If you go behind on your payments, you risk losing the car since you can't sell it.

Pros

✔️ Since you are the only owner of the vehicle, you have the flexibility to sell it whenever you need the money. 

✔️ You won't need to give any thought to your financing agreement's terms and conditions or your monthly loan payments. 

✔️ It won't show up anywhere on your credit report.

✔️ There will be no danger of you paying more on the loan than the car is really worth. 

Cons

❌️ As a result, you may be forced to settle for a car with lower standards of safety or dependability. 

❌️ You'll need quick access to a large sum of cash.

❌️ Managing a loan well won't enhance your credit score. 

In case you choose cash:

  • Funding insurance, taxes, and maintenance is essential for keeping an car on the road.
  • Even if you have to dip into your funds, you may be better off putting at least part of the car's price on a credit card so you can take advantage of the card's purchase protection. This implies that the card issuer shares any potential losses with the store. It's preferable to make a complete payment on the bill the following month.
  • If you want to buy the car with a loan:

You may get the lowest rates (APR) on any kind of financing if you use your funds to put down a sizable down payment.

0% cash-back

“0%” promotions are common, often provided to move an older or slower-selling model. No interest is added to the monthly payments, making them a reasonable option.

You should know that a sizable down payment is often expected (35 per cent or more) and that further reductions are very unlikely to be negotiated. If you are late with payments, you may be moved to a plan with a much higher interest rate.  

2. Peer-to-peer

Assuming you’re not borrowing from family, using peer-to-peer loans to finance a new car is still a form of social lending.

Social lending, also known as peer-to-peer lending, facilitates borrowing and lending between individuals without the need for traditional financial institutions like banks or credit unions. P2P loans are offered on websites like Zopa.

A high credit score is still required for the best rates, and late payments will have a negative impact on your score. It's possible to get a lower interest rate with a peer-to-peer loan than you would with a traditional bank loan, but this depends on your credit score.

Do you have a guarantor?

Guarantor loans are similar to traditional personal loans, except that another responsible adult (often a family member) agrees to take over payments if you default. 

If you've never signed any credit agreements before or have a shaky credit history, this is something to think about. This allows you to try applying for a loan again despite previous rejections. 

When you get a personal loan with a guarantor, that person promises to pay back the money if you can't. Due to the lender's assurance of getting their money back, the interest rate may be lower than it would be for a borrower with poor credit.

Be wary of…

The guarantor's position must be confined to that of an insurance provider, and they must have trust in the borrower's capacity to make payments. The individual offering to guarantee the loan must have an excellent credit score. Because of the 14-day cooling-off period, it may take longer for the funds to reach the ultimate borrower. 

The borrower has the option to terminate this Agreement within this time period. Before including a guarantor on an application, it is crucial to double-check their information. They should be in a stable financial position and have a substantial amount of equity in their property (at least 50 per cent) given the scale of the project. 

3. Standard loans

Personal loans are often the most affordable alternative to paying with cash when purchasing a vehicle, however, this is conditional on the borrower having a high credit score.

  • To avoid making several car payments, you might take out a loan for the whole amount you need to pay for the vehicle and repay it over time. Although the annual percentage rate (APR) is high, you will own the car outright and have the flexibility to pay off the loan over as long or as short a period of time as you choose. It might end up being more cost-effective than a dealer financing plan.
  • Keep in mind that the best loan conditions will be given to those who have established an excellent credit history. Prepayment fees might be incurred if the loan is paid off early. The depreciation of the car is your responsibility just as it would be if you paid cash.

If you have a solid credit history, a bank, credit union, or other lending institution will be willing to provide you a personal loan. You may pay it off in as little as one year or as long as seven. Verify that the loan is not a mortgage. If you fall behind on your mortgage payments, you might lose your house.

Compare the APR (or annual percentage rate, which includes extra costs you must pay on top of interest) to get the cheapest interest rate.

Pros

✔️ From the beginning of your loan, you have complete ownership of the vehicle and the option to sell it.

✔️ Personal loans are likely the most cost-effective alternative to paying with cash. 

✔️ It may be scheduled by phone, the Internet, or in person.

✔️ It may be enough to pay for the whole car.

✔️ If you look around, you should be able to find a fixed interest rate that suits your needs.

Cons

❌️ Some lenders may need a little processing time before making your loan cash accessible in your bank account.

❌️ Possible ripple effects on future borrowing.

❌️ The monthly cost may be more than you'd pay for comparable alternatives.

4. Individualised Payment Plan (IPP)

The monthly payments on this auto loan plan are less than they would be on a hire purchase plan.

However, you should be aware that the sum you end up paying back is often more.

  • Paying a down payment followed by manageable monthly payments over a certain time frame is a common method of doing so. At the conclusion of the term, you have the option of making one last payment to buy the car entirely (a “balloon payment”), returning the car, or selling it privately to cover the balance. This plan is tailored to those who want to trade in their vehicle regularly and is based on the car's “minimum guaranteed future value” (MGFV).
  • Keep in mind that in order to avoid fines, you must adhere to the agreed-upon mileage limitations and maintain the vehicle in excellent working order. You are just making payments towards the car while you are renting it. However, if you want to maintain the vehicle, it may be less economical than HP.

The difference between the car's original price and its estimated worth at the conclusion of the rental period is the amount of money you borrow. This is calculated by projecting yearly miles over the duration of the contract.

You have the option to:

  • You must return the vehicle to the dealer and pay any fees incurred as a result of your use of the vehicle (such as excessive wear and tear or going over the mileage limit).
  • Put the money you make back into a brand-new car.
  • You may retain it after paying the selling price. A balloon payment is another name for this. This is determined by the dealer and ranges from a few hundred to a few thousand pounds depending on the car's Guaranteed Minimum Future Value (GMFV). It's going to be a lot more money than your regular payment. You may need to take out further debt if you don't have enough cash on hand to cover this expense.

You must have paid at least 50% of the vehicle's price to terminate the agreement early or cancel it. If you haven't, the cancellation fee will be the amount you owe. The vehicle's condition is also important since any damage might result in additional fees.

Pros

✔️ Reduced recurring costs.

✔️ Deposits as low as 10% are common.

✔️ Loan periods are negotiable (between 12 and 48 months).

✔️ Option at the conclusion of the payback period.

Cons

❌️ If you go above your allotted miles, expect to pay more.

❌️ Scratches and other signs of excessive use might result in additional costs.

❌️ It's possible that the final cost will be more than if you had used hire buy.

❌️ The car is yours to keep provided you pay off the loan.

❌️ Check your PCP contract if you want to take your vehicle overseas; some firms have restrictions on the length of time you may have it out of the country, and you may need to get special authorization to do so.

5. Using HP (hire purchase)

Using HP (hire purchase) to buy a car: the vehicle itself serves as collateral for the loan in a hire purchase arrangement. You'll put down around 10% initially, and then make regular monthly payments for the rest of the loan's term.

  • Because the loan is collateralized by the car, you cannot sell it or give it back to anybody without the lender's consent until the loan is paid in full. A down payment (usually 10%) is made followed by monthly payments (including interest) for the life of the loan. After paying off the loan, you will have full ownership of the vehicle.
  • Remember: if you don't pay, the car goes back to the lender. It may be more costly than getting a loan from a traditional bank. It's important to read the fine print if you're hoping for free servicing.

The final payment must be completed before you may claim ownership. Therefore, you risk losing the vehicle if payments are late. The car dealer is the typical mediator of the hire purchase agreement. That makes them simple to set up and potentially highly cost-effective for brand-new vehicles, but less so for pre-owned ones.

Check what you'll be paying if you purchase a used vehicle to see whether it's worth it compared to the best rates for new cars. You may be allowed to return the car after making half of the payments, depending on the terms of your lease or purchase agreement. The vehicle's condition is also important since any damage might result in additional fees.

When you've paid off more than a third of your loan, your lender needs a court order to take back your car.

Pros

✔️ Deposits as low as 10% are common.

✔️ Loan periods are adjustable (between 12 and 60 months).

✔️ Low, stable, and competitive interest rates.

Cons

❌️ If you haven't paid off the car in full, you don't own it.

❌️ Short-term commitments often cost more.

6. PCH (Personal Contract Hire)

PCH (Personal Contract Hire) is a kind of car leasing: you rent a vehicle from the dealer for a set monthly rate, and the dealership takes care of all the repairs and upkeep. This is subject to a maximum number of allowed miles driven.

  • Similar to a PCP, but with no purchase option, this plan also features low monthly payments. However, it's handy, and swapping cars is simple. The total cost of a lease depends on the kind of vehicle leased, the duration of the lease, and the annual mileage cap. Up to three months' rent is often required in front.
  • Be advised that there is often a substantial down payment necessary, even if service is included. Again, there may be distance restrictions. The annual percentage rate (APR), the monthly payments, the total amount repayable, any additional ‘option to buy' costs, and the administrative fees should all be included in your comparison of offers.

When the lease is over, you return the vehicle. You can never claim ownership. Leasing (PCH) normally costs more per month than PCP. However, you’ll have more freedom to transfer providers and the whole cost might work out cheaper overall since the payment covers service and maintenance charges.

Pros

✔️ Driving with a predictable monthly payment.

✔️ Counts as part of the total price.

✔️ No worry about the car degrading in value.

✔️ Get offered 12 to 36-month payment plans.

Cons

❌️ The greater regular payment is due to the inclusion of service and maintenance.

❌️ The deposit is normally three months’ rent.

❌️ Costs may increase if you go over your allotted miles or if you decide to cancel your contract before its term is up.

❌️ It's never your turn to drive.

7. Credit card

Buying a vehicle using a credit card: if you plan on using a credit card to pay for all or part of your car purchase, you should know that doing so will provide you with additional consumer protections. 

That is, if you keep up with your card payments on a regular basis. ‘Section 75' of the Consumer Credit Act protects you if the car costs more than £100 but less than £30,000. However, some retailers add a fee for card processing of up to 3 per cent. And other vendors may not take credit cards at all.

Keep in mind that credit card interest rates may be greater than those offered by other lenders. If you need a loan and can pay it off over a few months without incurring any interest charges, a 0% offer is ideal. Pay down the bill in full without waiting for an introductory 0% APR period.

Other options…

Additional insurance and other goods that dealers may sell as part of a financing package may generate commission for the dealer.

Typical examples of these are:

  • Gap insurance, sometimes known as “asset protection”, pays the difference between your car's market worth and your loan balance or the cost to replace it in the event of theft or total loss.
  • Insurance against minor damage, such as scratches and dings, can reduce the resale value of your leased vehicle at the conclusion of the contract's term. Alloy wheels and tyres may both be insured separately or as part of a package deal.
  • It is usually more cost-effective to purchase these items separately from a third party if you are interested in doing so.  Ask for a price cut if you must buy them together, but consider doing so only if it saves you time.

Summary…

Our mission is to make the banking and lending process easier to understand. Let’s round out what we learned; here are things to watch out for when financing a vehicle… There are a few essential steps to take before making a final decision when comparing auto loan offers:

  • Verify that you will be able to maintain the loan's monthly payment amount without going into arrears. Don't forget about insurance, taxes, and upkeep while budgeting for your vehicle. 
  • Read the fine print to learn about things like mileage limitations, upfront costs, and who is responsible for repairs. Don't rush into a financial solution you don't fully grasp. If you have any queries regarding this, your financial provider will be pleased to help you out.
  • Find out from the company providing the financing what happens if you have trouble making payments one month and what alternatives you have in that event.

More things to find out: 

  • Evaluate the complete interest, principal, and fee burden of each loan option.
  • When considering a personal contract buy a plan or personal leasing, be aware of early payback or additional expenses, such as charges for exceeding the anticipated mileage.
  • Examine the APR (annual percentage rate), which factors in all fees, to get an accurate comparison of interest rates. Keep in mind that the interest rate will be lower if you deposit more money. It's important to know whether the interest rate is set or variable so that you can budget accordingly.
  • Payment protection insurance (PPI) and other insurance, such as GAP cover, may be costly and may provide only a little coverage, so it's important to give it considerable consideration before purchasing. If the remaining loan balance on your car is more than the car's current market value, then you may qualify for a payout from GAP insurance.

Using a price comparison website is the most efficient approach to finding a decent bargain.

Some places to look into are listed below.

  • GoCompare.com
  • Money Saving Expert
  • uSwitch

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