How much does financing a car really cost?

We love our cars, don't we? They give us the freedom to explore, to get to where we need to be, to sing karaoke at the top of our lungs. Maybe even to hide a secret stash of snacks. But they can be expensive, which is why so many of us opt for car finance to spread the cost over time. 

But, as convenient and flexible as car finance is, you’re not alone if you find the whole thing a bit, well, mysterious. You want to know how much you’re actually paying for your wheels, how can you figure it out properly? So glad you asked - let’s take a look.

How much does it cost to finance a car?

Let’s back up for a second - what does ‘car finance’ even actually mean? 

In a nutshell, it’s when you borrow money to buy a car, and pay for it in monthly instalments over an agreed period of time. But, there’s more than one way to finance a car. 

Here are the most popular types of car finance:

Hire Purchase (HP)

You pay an optional deposit, then make monthly payments to cover the cost of the car. At the end of the term, you pay an ‘option to purchase’ fee, and then you own the car. Sound good? Learn more about how hire purchase works before you go for it

Personal Contract Purchase (PCP)

You pay an optional deposit, then make monthly payments for an agreed term. Your repayments don’t cover the full cost of the car - because they cover the car’s depreciation plus interest - so at the end you can choose to give the car back, swap it for a new one, or pay a ‘balloon payment’ to own the car. Tempted? Weigh it up against hire purchase to see which could be right for you

Car leasing

You pay a deposit, make monthly payments to use the car for an agreed length of time, then give the car back at the end. There’s isn’t usually an option to own the car

When you’re looking at a car financing deal, it’s super important that you know what you’re signing up for - especially how much it’s going to cost you each month.

What are the different parts of the cost of financing?

You could be forgiven for thinking car finance would be as simple as taking the price of the car and dividing it by the number of months you’ve agreed to. There’s a bit more to it than that, as car finance costs are made up of a few different parts.

Here’s what can influence the cost of car finance:

The car’s value

Unsurprisingly, the value of the car is one of the biggest things that influences your car finance repayments. The more the car is worth, the more you’ll pay each month

The car's value

You’d usually pay a deposit at the start of the term (though not always - it’s possible to get a car finance deal without a deposit too). The deposit comes off your total loan amount, so the bigger your deposit, the smaller the loan amount, and the lower your monthly repayments will be

The loan length

You’ll always agree to a fixed term for your car finance deal, and it’s usually between 2 - 7 years. The length of your term will affect how much you pay each month. Generally speaking, a shorter term will mean higher monthly payments, but you’ll pay less overall because you’ll pay less interest. A longer term usually means lower monthly payments, but you’ll likely end up paying more interest, so this could push the total cost of the car up

Your credit score

This is a big deal when it comes to borrowing money, as it has a big influence on the interest rates you’ll be offered. If you have a good credit score and no debt, you’ll be offered a lower interest rate, On the other hand, if your credit score is on the lower side, you could still be approved for a car finance deal, but expect to pay a higher interest rate

Interest rates

You may be offered either a fixed interest rate, which will stay the same for the whole term of your agreement, or a variable interest rate, which could go up or down in line with the Bank of England base rate. With a fixed interest rate, you’ll pay the same amount every month until the end of the term, whereas with a variable rate, your repayments could go up or down depending on how the base rate might change

How can I lower the cost of financing a car?

With the rising cost of, well, everything, most of us have found our budgets squeezed recently. Paying for your car may well be one of your biggest regular expenses, but fear not - there are ways to reduce the cost of financing your ride.

If you’re looking at a new car finance deal, you could get lower monthly repayments by paying a bigger deposit, if you can afford to. 

It’s also worth thinking carefully about the length of your agreement, as a longer term will give you lower repayments but probably cost more overall, whereas a shorter term will likely mean paying more each month, but paying less in total.

Take a look at your credit score, too - if it’s a lacklustre, see what you can do to improve it before you apply for car finance. The better your score, the better the interest rate you’ll be offered, and paying less interest is never going to be a bad thing.

Already signed up to a car finance deal? Even if you’re part way through your term, and finding it expensive, there are things you can do to bring the costs down. From extending your loan or refinancing to a better deal, to swapping your car for a cheaper model, or even ending your contract, there are tons of options available. 

That’s the great thing about car finance - it’s typically quite flexible, so you can adapt it if your circumstances change.

How can I work out my repayments?

So now we know all about the different things that make up the cost of your car finance, and how to influence them, there’s just the small matter of figuring out how much you’ll actually pay every month. 

We’ve got your back! Just head to our handy car finance calculator to get an idea of how much you’re likely to repay every month. You’ll need to put in the amount you want to borrow, how long you want to borrow it for, and let us know a little about your credit score. 

It’s super simple, but if you’re not quite sure what you’re looking for (trust us, we know the feeling), we’ve got you. Our quick questionnaire will ask you a few questions to get started, and then you can take it from there. 

Heads up - the numbers the calculator gives you are just an example. They’re not a quote or offer, and they’re subject to change. 

Now you’ve got everything you need to know about how much it really costs to finance a car, you’ll be creating your car-aoke playlist in no time.