How does car financing work?
How does car financing work?
What is Car Finance?
Most new car purchases in the UK are funded by some kind of finance package. When you buy a new car, the chances are the dealer, broker or car supermarket will offer you a finance deal. This is basically an agreement between you and the lender with the car being their security, so you will not own the car until you have paid it off in full. It works well because you don’t have to come up with massive sums of money to buy a car that most people don’t have just kicking about. Though it is important to know the details of your deal before going ahead. These deals tend to last over years of repayments, so remember to think ahead.
How does car financing work?
What types of car finance is there?
The two most popular forms of car finance are Personal Contract Purchase (PCP) and Hire Purchase (HP). Both have their benefits, but which one will suit you depends on the car you are looking for, your finance history, and how much you can afford to pay back each month.
How does car financing work?
Hire Purchase (HP)
A HP agreement is a pretty straightforward affair. You will usually need a deposit of around 10% of the car's value, and then pay off the rest of the value plus interest over 1-5 years normally. At the end of the term you’ll pay a ‘transfer fee’ or ‘option fee’ to take ownership of the vehicle. It’s important to understand that you won’t own the vehicle until this payment is made.
Once you have made the last payment, the car is yours to do as you please to either sell or keep or use as a part exchange on a new car. How does car financing work?
Personal Contract Purchase/Plan (PCP)
PCP is basically a loan – but you don’t borrow the full price of the car. With PCP, you’ll need to put down a deposit of at least 10% of the car’s value, and then make monthly payments for three to five years, before having the option to buy the car, or switch the finance to a new car. This particular type of deal is very popular for those who like to change their car more often.
The payments will be based on 2 things; the interest rate (APR) and the lenders expected depreciation in the car’s value over the period of the deal. Depreciation is the key to understanding PCP. Cars lose value as soon as you drive them off the forecourt, but some models lose their value quicker than others. We have a more detailed description of PCP here.
Who is eligible for car finance?
There are only a few things you need to apply for finance:
Be over 18 years of age
Have a full/provisional UK drivers licence
Usually 3 months of bank statements required
Proof of address (e.g utility bill)
Copy of passport
Looking to see if you could be accepted? Why not have a look at our eligibility checker.
How does car financing work?
If you are thinking about car finance as a way of buying a car, then you will probably be wanting to know exactly what everything means and what is expected of you during your deal:
Deposit
If you are looking to take out a finance deal on a car, it is likely you will need some kind of deposit, not that it is required for every deal. But the larger the deposit, the lower the monthly payments you will be making! How does car financing work?
Monthly payments
It is important that you keep up your monthly installments, but circumstances can change and money can become tight very quickly. So it is vital that you communicate that to your lender, and they will do their best to help if you are struggling. If you want to cancel your finance, we have some more detail about that subject here.(link)
APRs
An APR is the Annual Percentage Rate. This is there to give you an idea of how much it will cost to borrow. It's a way of measuring the interest rate (and any other charges which are applied) to a number of financial products such as personal loans, credit cards and hire purchase agreements.
Who provides car finance?
There are specialist companies who provide loans and financial services, some specifically for car finance. CarMoney does not provide the finance.
How does car financing work?
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