What are the different types of car finance?

There are several ways to finance your car with credit. Here are the main ones:

Personal Loan

A personal loan may enable you to purchase a car outright. After that, you'll repay the loan over a predetermined period, typically with a fixed interest rate.

One of the benefits of a personal loan is that it is unsecured—that is, you are not required to use an asset as security, like your house or car. If you cannot repay the lender, they may sell the security to recoup their investment. You may need a high credit score to be approved for an unsecured loan because it entails less risk for you but more significant risk for the lender.

Sometimes, applying for a loan secured by your car will make getting approved or a better rate easier. But, if you cannot repay, you might forfeit the vehicle.

When you compare loans with us, you can see how likely you will be approved for a personal loan. It doesn't impact your credit score and is free. However, remember that we are credit brokers rather than lenders; while we cannot grant credit, we can assist you in locating an appropriate offer.

Hire Purchase

You must typically pay a deposit under a car rental purchase agreement to retrieve the vehicle. After that, you'll make monthly payments toward the car's purchase price. However, until the last payment and an additional "option to purchase" fee, typically in the range of £100-£200, have been paid, you won't truly own the car or be able to sell it privately. This is not the same as purchasing an automobile outright at the beginning of your repayment plan when using a personal loan.

If you stop paying under a hire purchase agreement, the company may take the car away to recoup the remaining balance. This is because your debt is secured against the vehicle.

Note that if you end a hire purchase agreement early, you may have to pay a penalty fee.

0% Finance

Specific vehicles have a financing option that requires a down payment and monthly instalments to cover the remaining balance. This option requires a sizable deposit, and your monthly payments might be high. However, if you follow the contract terms and make all your payments on time and in full, you should not be charged interest on the debt.

Leasing

When you sign a car lease, you pay regular payments to use the vehicle; you never truly own it. The cost to you is typically determined by the car's value, the duration of your use, and a predetermined mileage allotment.

There might be additional expenses, but your monthly payment might be lower than if you were paying off a car you purchased on credit. For instance, you might be assessed an "excessive wear and tear" fee if the vehicle is a little beat up when the lease expires.

You will likely require fully comprehensive auto insurance, or else you will have to pay for any damage to the car when you return it. Certain companies also need you to obtain gap insurance, which offers them additional security against theft or damage.

Personal Contract Purchase (PCP)

One of the most popular, sometimes most complicated, ways to finance a new car is through PCP loans. You cannot purchase the vehicle outright with PCP. Instead, you will borrow the remaining amount after making a non-refundable deposit toward the cost of the car. After that, you'll have to pay interest and depreciation (the amount the vehicle loses value while you own it) every month.

At the end of the contract, you'll usually have a few options:

• If you purchase the vehicle outright, you will be required to pay the vehicle's value (typically determined at the beginning of your contract) less your deposit. There might be an extra charge as well.

• I am swapping it out for a new PCP contract that serves as a replacement.

• Returning it will result in no further fees if you've complied with the conditions and the vehicle is undamaged.

People who like to change their cars frequently use PCP loans. Since you're not paying off the car, they typically have low monthly payments and the benefit of being very flexible. However, the interest rates are frequently more significant than those of other loan types. Additionally, you should carefully read the small print. In particular, keep an eye out for any penalties for going over the mileage allotted and causing damage to the car while it is being used.

Remember that you typically need a solid credit history to approve a PCP agreement, particularly for 0% or low APR deals.

0% Purchase Credit Card

Since many car dealers now accept credit cards, another option is to purchase your car entirely with a 0% purchase credit card.

Generally speaking, obtaining a high limit on a purchase card requires having a good credit score. Therefore, those looking for a reasonably priced car or those with good credit may find this option most appealing.

If you meet the minimum repayment requirement, you can choose how much you want to pay off each month on a credit card, giving you more flexibility. When you use a 0% purchase card, you won't have to pay interest on your purchase for a predetermined amount of time.

Pay the required minimum each month on time and in full, or you risk losing the promotional rate. Paying off the debt before the promotional period expires is also a good idea to avoid paying interest at the lender's standard rate.

Will I get accepted for car finance?

Having a high credit score can help you get approved for auto financing at the best terms. Lenders determine your credit score using information from your credit report, application materials (such as your income), and any personal information they may already have on file (such as past transaction history).

Obtaining a free Experian credit score can help you understand how potential auto lenders view you. When you compare offers with us, Experian can also verify your eligibility for credit cards and personal loans.

Can I get car finance if I'm a young driver?

As a young driver, your credit history may be minimal or nonexistent. This may make it more difficult for employers to determine your ability to repay loans, which lowers your chances of being hired. You can raise your credit score by taking specific actions. Alternatively, consider obtaining a guarantor loan, which enables a friend or parent to 'guarantee' that you will repay the debt.

What do I need to know before applying?

Before applying for a loan, credit card, or another form of credit to finance your new car, here are some key things to consider:

• How much do you need to borrow?

• How much can you afford to repay each month?

• What type of rate are you getting? If it's variable, can you afford a rate rise?

• How long do you want to spend repaying the loan?

• How much are you willing to pay in interest overall?

• Do you want to own the car, and how soon?

• How long before you replace your car again?

• Are you comfortable with a mileage limit? How much mileage will you do?

• Are there additional costs involved, e.g., extra insurance or penalty fees?

Finally, keep in mind that owning a car has continuing expenses. Insurance, road tax, MOTs, fuel, repairs, and other costs must be paid. Ensure you can afford the monthly payments and the expenses of operating a car before signing a car finance agreement. This is because your other financial obligations may change over time. Your credit score may need to be improved from late payments, making it more difficult for you to obtain credit in the future.