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Car Finance Explained: Everything You Need To Know!

Do you want to learn more about car finance? Well look no further, you've come to the right place! In this article, we touch on many aspects of car finance, just click on the section to head over to the detailed article.

What is car finance?

As a quick summary, car finance is a loan that pays for a car you want to purchase. It could be a partial loan (where you contribute a deposit at the beginning) or it could be what we call a 'zero deposit' loan, where you borrow the entire amount. You apply for the finance, buy the car and then make the agreed monthly repayments to the lender. You can find car finance loans from different places, including the car dealership itself, your bank, a building society, a car finance specialist, or other lenders. 

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Want to learn a little bit more about car finance? Check out this handy video all about car finance 👇

 

What is the meaning of car finance?

Financing your car allows you to spread the cost of the overall price, paying in monthly instalments. This can be helpful if you don't want to pay for a vehicle up front and would prefer some flexibly over the way you pay for it. Car finance also tends to be easier than getting a bank loan, and there are some zero deposits deals available for buyers. Like with most loans, you will need to pay interest on top of the price of the car. Agreements usually start at a minimum of 12 months but can last for as long as seven years. 

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What is car finance in simple terms?

Whether you don't have enough money to buy a car outright or would simply prefer to spread the cost, car finance can help. In simple terms, it allows you to buy a car without paying for it all in one go. Instead, you pay a set monthly amount to the lender over a period of time, usually anywhere between 12 months and seven years. In layman's terms, car finance is buying a vehicle while borrowing the money to pay for it. 

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Is car finance the same as a loan?

While car finance and loans are similar, they aren't exactly the same. Things like interest rates, the terms and conditions and need a good credit history apply to both loans and car finance. But loans don't need a deposit (unlike most car finance), plus you also own the car outright with a personal loan – although you still need to pay the amount owed. The length can also vary. Car financing tends to be up to five years, while a loan can be seven years or even longer in some cases. 

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What are the different types of car finance?

Car finance involves you spreading the cost of a car over monthly payments that can last for anywhere between 12 months and seven years. There are also different type of financing options available, such as personal contract purchase (PCP), hire purchase (HP) and a personal loan. All of them have their pros and cons, and it ultimately comes down to the options that best suits your needs. For example, PCP involves you making monthly payments with a balloon payment at the end of the term to purchase the car outright while a personal loan allows you to buy the car upfront and pay a portion of the borrowed amount each month. 

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What is a PCP vs HP finance agreement?

On a PCP agreement, you're only borrowing a proportion of the cost of the car. You'll have fixed monthly repayments over 2 or 3 years, which are calculated based on the 'Guaranteed Minimum Future Value' of the car at the end of the contract. Once the contract comes to an end, you can choose to buy the car, or hand it back.

HP is way more simple. An HP agreement is similar to a traditional loan, and you'll pay back the total cost of the car over, usually between 1 to 5 years, but can be longer sometimes!

With an HP agreement, you own the car at the end. With a PCP agreement, you don't own the car, unless you pay the final payment.

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Is car finance the same as hire purchase?

Hire purchase (HP) is a type of car finance that lenders and financial institutions offer individuals who want to purchase a vehicle. Along with personal contract purchase (PCP), it's one of the most used ways for people to buy a car. With HP, the cost of the car, less any deposit (often around at least 10%) is spread over a few years, and you’ll pay the car financing company a fixed monthly payment for the term of the HP agreement.

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Do I need GAP insurance?

If you're not purchasing cars everyday (which we assume you're not!) then some of this jargon can be confusing. What is this GAP insurance and do I really need it? When spending thousands on a car, you probably want to save on other costs, however GAP insurance could be just the protection you need, and actually can be quite affordable. For any insurance policy or purchase like this, you'll need to look at it in detail, as one GAP insurance policy can drastically differ the next! We've put together some of the common types of GAP insurance that you might come across, so you can get up to speed before you decide. 

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Are extended car warranties any good?

Another fun one here! We've found that no extended warranty is exactly the same, and the aspects covered for each one vary quite a bit. It's super important to read the small print and understand what you're covered for. As you'd expect, the higher the cost of the warranty, the more you're covered for when it comes to parts and labour. 

If you get your warranty from the car dealership, then you'll likely need to get the car serviced there too. Alternatively, you can sometimes find an "aftermarket warranty", which covers the same aspects as other warranties but is provided by a third-party. 

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Things your parents should teach you about car finance

How do you choose your first ride, how should you pay for it, do you buy it with cash or should you get car finance? These are the type of questions your parents might tell you about getting a vehicle and taking out car finance. But just in case they haven't given you the lowdown, allow us to help out. Car finance allows you to spread the cost of the vehicle and includes interest on top of the sale price. There are plenty of ways to finance your car, including PCP, HP and a personal loan. Each one has its pros and cons, but the most important factor is your ability to make the monthly payments without any issues. 

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What to do if you're rejected for car finance

There are several quite common reasons that car finance applications are rejected, and many of today's lenders just use the same, archaic process they've been using for years. Some of the top reasons might actually be nothing to do with your credit file... for example, maybe you just made a mistake on the application! Another common reason is due to the lender's particular criteria. They set boundaries in place based on their past experiences and learnings from existing customers. It might be that you fall just outside the profile of who they can lend to. 

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What happens if I can't keep up with my car payments?

Finding yourself in situation where you're struggling to make your monthly payment commitments can be a worrying and anxious experience – and hopefully, it never happens to you. However, unexpected changes can happen in your life, and the most important thing to do is to stay calm! Your lending is actually obligated to handle these difficult situations with care, understanding and should help you to find a solution that suits your new situation. 

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If I get car finance, what are my rights?

Borrowing a loan to purchase a car affords you certain rights. They are put in place to protect you from problems arising, especially if you feel like the dealer has misled you. For starters, goods must be as they are described in the sale, be fit for use, and of satisfactory quality based on the Consumers Rights Act. Plus, most dealerships offer a 12-month warranty, and you have the right to return the car within 30 days of purchase. Private sales, however, can be more problematic as some parts of the Consumer Rights Act don't apply. Even so, the seller must accurately describe the car and have a legal right to sell the vehicle. 

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Is car finance halal in the UK?

Under Sharia law, charging interest or riba is not allowed. In the UK, however, interest is a common part of car finance, meaning it's not typically halal. Still, that doesn't mean you can't get car financing if you'd like to buy a new vehicle, and car financing is still available for people who respect and want to follow Sharia law. 

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Is getting car finance a good idea?

As long as you're aware of the responsibilities involved with getting car finance and can comfortably afford the repayments, then it can be a helpful way to purchase your next vehicle. Fixed monthly repayments also mean you know the exact amount you need to pay each month, while  you can also sell the vehicle anytime and payback the lender. However, it's important to remember that you'll need to cover any repair costs once the warranty has ended, and you should also consider car depreciation as most vehicles lose their value as they get older. Take all of these factors into account, and car finance can enable you get the keys to your next vehicle. 

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Car finance jargon explained

If you're new to the world of car finance, you might be slightly confused by some of the terms thrown around. Whether it's balloon payment, equity, fixed-rate interest or personal contract purchase, there are plenty of words to understand. Ultimately, none of these jargon words are anything to be scared of – fixed-rate interest, for example, simply means the interest you pay is fixed and doesn't go up or down. While personal contract purchase is a form of car finance you can use to pay for your vehicle. 

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