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Welcome to our used car finance information centre
Once you’ve decided what car you want to buy, you have then got the difficult task of choosing your finance options. There are many different ways of financing a used car and we will outline the pros and cons of each method in this section. Whatever method of car finance you choose the most important thing to remember is to work out your budget carefully and make sure you stick to it. Car buying can be an emotional experience and it’s easy to get carried away and overstretch yourself in order to get the car you really want. Self-discipline is the most vital tool in getting a good used car finance deal. A great deal and a low interest rate are no good if you can’t afford the monthly payment.
Sometimes referred to as dealer finance, this is the traditional method of financing a used car and is still widely used today. Your dealer can arrange this for you or you can contact a finance company direct.
The dealer can arrange hire purchase quickly at the same time as you are buying your car. In most cases decisions can be made straight away and you can sign up there and then. There are special schemes for customers with low credit scores who may not be able to get a bank loan. At the end of the term the car is your property. By using hire purchase you are not tying up your option of a bank loan on your car. You may need a bank loan for something else in the future and this method keeps that option free.
You may have to haggle to get a really good rate of interest. The dealers get paid commission on hire purchase deals and will try to charge a rate that is more beneficial to them. If you go direct to the finance company you may find they are not as competitive as the banks. Most Hire Purchase deals will require a deposit. Specialist and guaranteed car finance deals will require a larger deposit. Buying a car and arranging finance at the same time can be confusing for the customer and getting a good deal on both will be difficult. The dealers will exploit this situation wherever possible. Hire purchase car finance is secured on the vehicle so it can be awkward if you want to sell it on.
Always get a personal loan quote before you go to a dealer and arrange hire purchase, the chances are the dealer will not be able to compete. This is a highly competitive market and loan rates are cheaper than ever. Unless you have already taken a bank loan for something else then we would recommend this method in most cases.
Loans can be arranged in your own time and you can shop around for the best deals. You can finance the whole amount of your car purchase. The loan is not secured on the car so you can sell the car when you like or change your loan for a better deal later on. The interest rates will be low. You will only have to negotiate a deal on the car with the dealer and not the finance. The dealer will be forced into quoting their best available hire purchase deal.
You may already have a bank loan for something else. A loan can sometimes take a few days to arrange. The rate advertised is not always the rate you will get. Most loan and car finance rates are based on individual circumstances and credit scores.
Personal contract plans are a method of leasing a car, which is available to individuals. You make an up front payment followed by monthly instalments. At the end of the term you make a balloon payment and keep the car or you hand it back and pay nothing more (subject to conditions). Alternatively if the car is worth more than the balloon payment you can sell it and pocket the difference.
Monthly payments may be lower than other methods due to the front and back end payments. Some PCP or lease plans can include vehicle maintenance. You can get a guaranteed future value (GFV) so if the car is worth more than your balloon payment then you can sell it and keep the difference. In many instance this will be the case and it encourages people to take another PCP deal using their profit as their next deposit.
Overall interest payments can be high. There are many contract clauses on the mileage and condition of the vehicle and you will be penalised for breaking these conditions. If you car is worth the same or less than your final balloon payment then you will have to return it and be left with no car and no deposit for another contract.
This can be a lengthy and expensive way of funding a used car purchase. We would not recommend this method unless you are re-mortgaging anyway.
Low interest rates Very small payments
Expensive in the long run, you will be paying for your car for many years and overall payments will be larger than with a conventional short-term loan. Takes longer to arrange and may incur other fees.
You may have seen dealers advertising 0% finance deals. They can do this by paying the interest for you. This is just another way of offering discount on a car - but there are catches. For example, the amount of deposit required is much higher than usual, sometimes as high as 30-50% and the loan terms are shorter, normally 12-24 months.
The APR is the interest rate of a loan but includes calculations for all fees and charges attached to the loan; therefore it varies from the flat rate of interest. Lenders are required to quote the APR and it gives the customer a quick method of comparing loans. Dealers will often talk about flat rates of interest to confuse the customer, as they are lower than the APR and do not include calculations for fees and additional charges. The best way to compare deals is to look at the total amount borrowed, the length of the loan and the monthly payment.
Many loans will carry fees for arrangement and documentation; these are usually added to the first and last payments.
All lenders will offer payment protection. This is an insurance policy that will cover your payments in certain circumstances such as unemployment, injury, death or sickness. The terms and conditions of these plans can vary, as can the rates of interest.
If you have an accident and your car is written off, you may find your insurance payout does not cover the outstanding balance of your finance deal. Your car will devalue quicker than your loan settlement to start with and then slower as the car gets older, this means that you could be in “negative equity” for a while. This is common situation for people who have purchased a car on finance with little or no deposit. The insurance valuation does not cover the finance settlement and the customer has to find the rest. This is known in the trade as being “upside down”. This would also be the case if you tried to part exchange your car soon after buying it; the trade in price would not cover your settlement payment. Gap insurance is a policy that covers this shortfall ensuring your finance is paid off in full in the event of a total loss claim. Click here for a finance quote
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