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Explain Car Finance to Your Children

As parents, you’d want your children to be financially responsible and make the right decisions about their money. 😊 If they’re at an age where they’re legally allowed to drive or buy their own car, they may also be looking at borrowing some money, so it’s important to explain car finance to them. Helping your children become financially aware can be super helpful so they don't get caught out in the future, and you can also help them to start preparing their credit score.

You can share with them your experiences when you applied for car finance and what the processes were. It will prepare them for their own application and give them better chances of getting approved by the car finance company. But to help you explain car finance to your children that little bit more easily, here are some of the essential points you can discuss. 

Car Finance Meaning Explained

What does it mean when a car is financed? Basically, it means that a car finance company purchases the car of your choice and you’ll pay them back via fixed monthly instalments for a few years. While you’re still paying for the car, the car finance company owns the vehicle. But once you’ve fully paid the amount required, then they will transfer the car’s ownership to you. You’ll be free to do whatever you want with it. 

Car Finance Options UK

There are several car finance options available to car buyers. Hire Purchase, Personal Contract Purchase, and Car Leasing are the most common ones. They are similar in many ways. For example, you'll need to pay a fixed amount every month for the car to the car finance company. These arrangements differ when it comes to what happens to the car when your contract ends.  With HP or PCP you will sometimes need to have a deposit of around 10%, but there are some zero deposit deals to be found. 

Hire Purchase

With Hire Purchase, you will be the owner of the vehicle when you’re done paying the car finance company. You don’t have to pay for anything else after that. However, expect the monthly repayment amount could be higher compared to other car finance arrangements. You can check the amount you have to pay every month by using a car finance calculator and start thinking about if it's affordable for you. A calculator will give you an idea of how much you need to prepare monthly for the payments, and how much that monthly payment enables you to borrow.  

Personal Contract Purchase

In a Personal Contract Purchase, it works almost the same way as Hire Purchase. The main difference is the option you have when you reach the end of your contract. It’s because you can choose to pay the optional final "balloon" payment and own the vehicle, or you can return it to the car finance company, or trade it in against your next car. The monthly repayment amount is lower for Personal Contract Purchase but keep in mind that there’s a balloon payment (which can be quite significant) at the end if you want the car to be yours. 

Car Leasing

Car Leasing is another car finance arrangement that you can choose if you don’t feel the need to own a car. The same as the two arrangements previously mentioned, you need to pay the car finance company every month. However, for Car Leasing, you will not be able to own the car at the end of your contract. You have to return it to the car finance company. It’s like a long-term car rental. If you want to drive a new car every one to two years, this is a great option for you.  

What Checks are Done for Car Finance?

It’s important to prepare your children for their car finance applications. There are several checks that the car finance company does before granting financing to the car buyer. It would be great if your child already has their own driver’s licence. Most lenders will also use the driver’s licence as proof of identity. It gives them assurance that the applicant is legally allowed to drive. 

The next check is the address history. Car finance companies want to ensure the traceability of the applicants, that’s why they ask for proof of address. Your child can present their utility bills or bank statements for this. If they’ve lived in various places, they also have to declare their address history for the past three years. They have to make sure that the addresses are specific and correct, and can be seen clearly in the documents they’ll submit. 

Car finance companies also check the applicant’s income and credit history. Your child might not have much of a credit history to show, so if this is the case, some lenders may allow you to be a guarantor for your child’s car finance application. Since you have longer credit history and a more significant income, you can help increase your child’s chances of getting car finance. Unfortunately this is not something Carmoola offers at the moment, but a quick google search will help you find lenders who can help.

Pros and Cons of Buying a Car on Finance

Like most things, there are pros and cons to car finance. Some of the disadvantages include paying the lender interest on top of the borrowed amount, the car won’t immediately be yours, and limitations to the modifications you can do to the car. Nonetheless, this may not be a big issue if you look at the advantages. 

With car financing, you don’t have to spend a big chunk of your savings for this one purchase. The payment will be spread over a period of three to five years. It would be easier on your pocket to make monthly instalments for the car. You’ll have enough funds for other car-related expenses like petrol, maintenance, repairs, and insurance. 

While the car may not be yours immediately, you can still use the car as though it is your own. A responsible driver will take good care of the vehicle they’re driving, regardless of whether or not they own it., but be aware of potential penalties for damage to the vehicle or doing excess mileage if you have opted for a PCP or lease. And once all payments have been made, of course you can make any modifications you wish to.  

However, it's important to consider the risks of car finance. If your child does not make the repayments on time as agreed and you are noted as their guarantor, then you will be liable for the payments. If you're unable to pay, then the car may be taken away.


It’s crucial to teach our children to make good choices when it comes to big purchases like buying a car. Getting car financing could give them the opportunity to practice being responsible with their money and their car. It’s a good way to nudge them into adulthood and the responsibilities and freedom it entails, but you must also explain the risks to them.

Want to know more about how you can be a guarantor for your child’s car finance application? Check out this article

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