What is the Best Way to Finance a Used Car?

If you’re looking to finance a second-hand car, it’s important to understand your options. From HP to PCP, there are plenty of ways to finance a used car.

Don’t be swayed by last-minute sales pitches at the dealership - These often tend to work out more expensive than finance from independent lenders.

Here, we’ll reveal everything you need to know about the different types of finance available.

What is Car Finance?

Car finance is essentially a loan agreement, where you can pay for your car in monthly instalments.

You will typically need to pay a deposit upfront, though zero deposit deals are available.

The term of the finance agreement and the monthly repayments will vary from one type of finance to the next.

Usually, finance agreements will last for around 2-5 years. Typically, the longer the agreement, the lower the monthly payments.

It’s also worth noting that the better your credit score, the lower the interest rate (and monthly payments) will be. 

Types of Car Finance: A Comparison Guide

There are three main categories of car finance you'll come across in your search.

These include Hire Purchase (HP), Personal Contract Purchase (PCP) and Personal Contract Hire (PCH).

Let’s explore each type of finance and how they compare:

HP Car Finance

HP is the easiest type of car finance to understand. You usually pay a small deposit towards the car, and then take out a loan for the rest.

You repay the loan in monthly instalments, and at the end of the contract the car is yours.

The finance is secured against the car you purchase, which means if you miss repayments, it can be taken away by the lender.

PCP Car Finance

With PCP car finance, there are some similarities to HP agreements. You'll often pay a deposit when you first get the car and have set monthly repayments over a fixed term.

The key difference is at the end of the loan term, you can choose to return the car or pay a balloon payment to own it.

PCH Car Finance

 PCH car finance is basically a long-term hire agreement. It is more often used for new cars rather than used.

You pay a monthly repayment for a set term, stick to a pre-agreed mileage, and return the car to the dealer at the end.

As you can see, each type of car finance works slightly differently.

If you aren’t planning on buying the car at the end of the term, PCP would be the better option.

HP deals are better if you do want to buy the car, but the monthly repayments will be more expensive than PCP.

Factors Affecting Used Car Finance: Getting the Best Rates

There are various costs when it comes to financing your car, including your credit rating, the term of the contract, and the deposit you make upfront.

Let’s explore these, and other factors that can affect the rate you receive:

Your credit rating or risk profile: Your credit rating plays a pivotal role in determining your finance rate. A higher risk profile often translates to more expensive interest rates.

The interest rate for the loan: The base interest rate set by the lender will directly influence the overall finance rate you're offered. It's a key component to consider when comparing deals.

The total term of the contract: The duration of your contract can impact the rate you are offered. Typically, terms span between two and five years, and the length can either raise or lower your monthly costs.

The total amount you want to borrow: The more you wish to borrow, the more risk the lender takes on. This can, in turn, influence the interest rate you're offered.

The deposit you pay upfront: A large initial deposit can often earn you a more favourable finance rate. The upfront payment reduces the lender's risk, leading to potentially lower interest rates.

When looking into the best rates, make sure you read the small print. For example, you may find some lenders charge a fee to pay off the finance early.

If this is something you are interested in, use an early settlement calculator to determine how much it will cost.

Leaving a Used Car on Finance: When to Consider Refinancing

If you already have finance on a used car, did you know it may be worth switching lenders? Refinancing can be a great way to find a better deal with more favourable terms.

Maybe your credit score has improved, or perhaps market rates have dropped. In some cases, you might just want to adjust your monthly payments to better suit your current financial situation.

Knowing when it’s the right time to refinance can be tricky. There is no one-size-fits-all answer here.

If you spot a chance to snag a better deal or feel your current agreement isn't cutting it, then refinancing now is a great option.

You can refinance with Carmoola today with our fully online application process.

Tips for Financing a Used Car: Finding the Best Deals

If you want to find the best deals, remember that there's more than one way to finance a car.

Hire Purchase may require higher monthly repayments than PCP, but you won’t have a lump sum to pay at the end of the agreement.

Before getting too ahead of yourself, take a quick peek at your credit score. A good score can get you some great deals.

If needed, spend time improving your score so you aren’t hit with high interest rates.

As tempting as it is to grab the first deal that comes your way, shopping around could get you a way better offer. You'll be amazed at what you can find with a little patience.

If you have savings, consider putting down a larger deposit. It’s a simple way to reduce your monthly payments and could nab you a better interest rate.

Take your time, do your research, and don’t be afraid to ask questions. That way, you’ll zoom through the car finance process and onto the open road in no time!

At Carmoola, we offer used car hire purchase deals to suit most circumstances. We make it easy to finance a used car with our fully online process.

You can also check out this useful video put together by our very own Jade:

Learn more about financing a second-hand car:

• How to Buy a Used Car on Finance
• Can You Get PCP for Used Cars?
• Top 20 Cars Financed by Carmoola in 2022