Motoring Guide - Car Finance
Credit for cars is one of the biggest areas of consumer credit after home mortgages, and the market is split between traditional
loans and other finance schemes such as HP and PCH. In order to decide which type of loan you need, you will need to consider
your plans for the car. The crucial question before entering into a credit agreement or taking out a loan is 'Can I really
afford it?' If you're in any doubt at all about whether you can meet the costs, don't sign it. Choose a cheaper loan, a credit
agreement with lower instalments, or even a cheap car that you can buy outright with a one-off payment.
Understanding the options and the jargon is the first step in negotiating the finance. This guide outlines the main options
available, and tackles some of the most frequently asked questions about car finance.
What you need to know
Compare the deals, and especially the interest rates charged, by building societies, banks, independent finance brokers and
dealer's own schemes.
- Always compare like with like - if you need to borrow £5,000 and would like to repay the loan over three years;
ask each lender for details of the APR (Annual Percentage Rate) on a loan of this amount. The size of the monthly
repayment over 36 months, and the total amount repayable.
- Don't forget to check if the interest rate is fixed or variable.
- With some schemes you're not buying the car but renting it on a long-term basis!
- Decide how much you can afford to pay per month. Paying off a loan adds to your costs, so try to repay it as quickly
as possible - total interest charges are lower for short-term loans.
- Borrow only what you can afford to repay, and always try to put as much of your own money as possible towards buying the car.
There are two main options. The simplest is a loan from a bank or building society, where an amount is borrowed to pay for the car
outright, and this amount is paid back, plus interest over an agreed period, to the lender.
The other is to opt for dealer financing and there are several different options available:
Hire Purchase (HP) or conditional sale
The conditional sale is common at franchised dealers. You pay an initial deposit, then the balance plus interest is divided into
fixed instalments over a fixed period. The vehicle is sold to you provided all the payments are made, the car is comprehensively
insured, and the car is maintained in good condition. You only own the car when the last payment is made. With Hire Purchase the
terms are similar, but you hire the car with a final 'option to purchase' fee payable at the end of the contract.
PCH - Personal Contract Hire
If you are interested in a nearly new car, you may consider Personal Contract Hire (PCH), also called Personal Leasing. This is a
long-term rental where maintenance is covered, but ownership of the car never passes to the person paying the instalments. This may
be suitable if you are self-employed - ask your accountant for advice. Documentation fees are added to payments at the beginning,
or end of the agreement. This administration cost should be clearly detailed and can be anything from £50 to £100.
Personal Contract Purchase (PCP)
You pay a deposit (up to 20% of total), followed by agreed number of low monthly repayments for up to three years. A final payment
must then be made. This is agreed at the start and is known as the Guaranteed Minimum Future Value (GMFV). At the end of the agreement
that you can keep the car, hand it back, or part-exchange it for another new car.
PCP is available for new and nearly new cars only. If you want to keep the car you must pay the GMFV. If you hand it back, you
owe nothing more, however you won't have your deposit or payments refunded.
The disadvantages are that the GMFV could be quite a high amount (especially if the dealer has been over-optimistic about the
resale value of the car). You could end up with neither car nor money, you would have to maintain the car to the manufacturer's
standard, and your mileage may be restricted. If you part-exchange the car, the dealer will value it. If it's worth more than the
GMFV, he'll put that amount towards the deposit on your next car. But if it's worth less you won't have to make up the shortfall.
Choosing the right finance for you
Decide whether you want to own the car at the end of the repayment period, or whether you will want to swap it for a newer one. Calculate
what you will actually be paying for the car in total - the actual cost of the finance scheme - and how much deposit you can afford. If
you don't have much money for a deposit, consider personal contract hire schemes. These work like a hire agreement, and at the end of
the payment period the car is handed back to the dealer. If you can afford a substantial deposit, a hire purchase scheme is worth
considering. The monthly payments will be lower, and you can own the car at the end of the period.
Remember that all long-term payment schemes are based on the initial purchase price of the car. By the end of the payment period, the
car will be worth considerably less! Most hire purchase or personal leasing agreements set mileage restrictions. Exceeding these can incur
The right finance - at the right price
Always read the terms and conditions of the scheme and shop around. Firstly, there is the Annual Percentage Rate (APR) which all lenders
must quote by law. The lower this figure is, the cheaper it is to borrow the money.
Then there is the Repayment Period. For example, £200 a month over three years (total repayment £7,200) is £1,200 more than £250 a
month over two years (total repayment £6,000).
The faster you repay the money, the less it costs you. Finally, compare any finance arrangement fees and penalties that could be
imposed for exceeding a mileage limit, repaying early or returning the car in poor condition. You need to compare the cost of the car
had you bought it outright for cash with what you will pay at the end of the agreement. The difference between the two figures will give
the total cost of borrowing the money. Go with the best deal, but first read all the small print.
The lender will ask for relevant facts concerning home, mortgage, income, bank and credit card accounts and details of any other outstanding
debts. The lender acquires information from a credit reference agency, which use public records to confirm your identity and address. They
check for debts registered over the previous six years and any county court judgements (CCJs) against you. Any information on you shared
by finance companies; banks and other lenders will be assessed.
Should credit be refused, ask the finance company why your application was turned down, and whether you have failed the credit checks.
You have the right under the Data Protection Act to search your record at the relevant credit reference agency (the lender must supply their
details) and to correct any errors in your record. There is no 'blacklist' as such; just a process called 'credit scoring' based on many
different factors. You can find out what these factors are by viewing your credit record. Most lenders use similar methods of credit
scoring, but different lenders have different loan policies. You may be turned down by one lender but accepted by another - although
you'll probably pay a higher rate of interest if you are rated a high-risk borrower.
What if the car is faulty?
Keep paying the instalments, otherwise you will be in breach of the credit agreement. First ask the dealer to rectify the fault. If the
car is still within warranty, repairs will be carried out at no cost to the dealer or you. Buying a car via a credit agreement means that
the lender has a responsibility to ensure the quality, fitness and description of the vehicle before entering into a contract. Also, as
the car belongs to them, it is in their interest to rectify any major faults.
Cancelling a credit agreement
Most credit agreements can be terminated, provided you act quickly. There are details on the contract document and notice of your rights
to cancel should also follow a few days after signing. However, if the documents are signed on the dealer or lender's premises, you lose
the 'cooling-off' period in which you can cancel without penalty.
The agreement can be legally terminated at any time, if you are not the owner of the car until the last payment is made (as is the
case with Conditional Sale and Hire Purchase agreements). Provided you have paid half the credit price of the car, you can simply hand
However, you will lose all the payments you have made to date, and will be liable for further charges if the condition of the car is
poor. If you haven't paid half of the credit price of the car, you will lose the car and still be liable for any outstanding payments.
Generally, this is the worst case scenario of a credit agreement.
Although most people only think of their bank or the dealer for finance, shopping around for a number of quotes for car finance
providers can save you money. Try to compare three different options to secure a good deal in perhaps the same way you would for car
or home insurance.
Have a look at Deepoq Car Finance
for further information and advice on financing your next car purchase.