How Does Car Finance Work in the UK?

Great you've made a decision to get your next shiny new car - way to go! 😃 But now you need to decide how you're going to pay for it! If you want to buy your car through car finance, you might be wondering - how does it all work? 

Do you really need to pay in cash when buying a car? Not necessarily. You might have some kind of deposit saved up, but If you needed to fund the whole cost, then only a few people would be able to drive the vehicle of their choice! The truth is that most of us need to get some type of financing to purchase a car because it’s such an expensive purchase. 

Even if you do have the money, it doesn’t always make sense to spend it all in one go. The more sensible and practical thing to do would be to know how car finance works in the UK. Then once you have done your research, you can choose a suitable financial provider for you, and apply.

Once you’ve been approved, you can buy the car and then spread out the payment over a fixed term. But how does car financing work? Let’s find out!

You have several options if you want to buy a car. You can get financing from the car dealership, credit union, bank, online finance company, and other car finance companies. Let’s take a closer look at your options and the pros and cons that come with them. 

Car Dealership

Securing car finance from the company where you’ll buy the car is fast, convenient, and they also offer competitive rates. However, for many car dealerships, the experience of most car buyers is that it costs more compared to the deals offered by other lenders. 

You also have to be ready for the big sell for add-ons that they’d convince you to get, like upgrades and various insurance options. Another thing you need to be aware of is that most loans from car dealerships are front-loaded. This means that you’ll be paying off the interest first, and then the principal amount toward the end of your contract. 

Credit Union or Banks

Car financing from these financial institutions has better rates compared to car dealerships. You don’t have to worry about hard-selling tactics to get you to purchase add-ons. A benefit of getting car finance from banks or credit unions is that they would usually provide bonuses like free disability insurance or life insurance. And you can choose where to go to buy your car armed with your finance offer. 

As for the car finance agreement itself, it’s usually a simple and straightforward interest loan where you have to pay the principal amount plus interest. The interest is evenly spread throughout the agreed loan term. While all these things are great, car finance from banks or credit unions is not always as convenient compared to dealership financing. 

Online Finance Companies

These financial institutions are the future of car financing. You apply for a loan online or through their apps, submit copies of the required documents, and then everything will be processed online. When it comes to convenience, their process is much faster, simpler, and easier compared to any other lending institution. 

Gone are the days when you have to wait for an important phone call about your car finance application or go to the company’s office to personally appear before a loan assessment officer. With online finance companies, every bit of the process is done online. Simple! And fast!

A downside to this option is that there are scams out there that you have to be careful of. Read customer reviews and research as much as you can about the lending company before signing any agreement. 

Car Finance: How Does It Work?

What you first need to understand about car finance is that there are several types of car financing that you can choose. It includes dealer finance, hire purchase, PCP (Personal Contract Purchase), lease, and personal loan. When you’ve identified the type of financing that fits your situation best, then you can proceed to choose the lender where you’ll apply for car finance. 

Personal Loan

Personal loans are popular among car buyers because it’s a versatile product that you can use for any purpose, not just for buying a car. You may sometimes apply for a secured loan where you need to have collateral like the vehicle, your property, or something of value. 

Unsecured loans are also available but the disadvantage of this is that if you fail to repay the loan, the financial institution can seize any of your assets so they can cover their loss. Its interest rates are also higher compared to secured loans because it’s riskier for the lending company since there’s no collateral. 

A personal loan is ideal if you want to own the vehicle outright straight away, and you plan on keeping it. If you don’t want any mileage limits, this type of car finance is a good choice, too. 

Personal Contract Purchase (PCP)

PCP is another type of car finance that many car buyers opt for. For this financing deal, you need to pay a deposit, the fixed interest rate, and the monthly payments. You can choose the lending term you’re most comfortable with, like 12 months or 36 months. 

The PCP is a great choice for those who are not sure what they want to do with the vehicle because the agreement gives you three choices. You can return the vehicle, keep it by making a final payment, or even trade it and get a replacement. 

If you want to return it, you don’t have to pay anything else unless there’s damage or you’ve exceeded the mileage limits. But if you like to keep the car, you’d need to pay a final payment so that the ownership of the vehicle can be transferred to you.

Hire Purchase

For car buyers who want a simple car finance deal, go for a Hire Purchase agreement with a reliable lender. This is how it works, you pay a deposit of 10% of the car’s value, and then after that, you’d need to repay the lender a fixed amount every month. This goes on for a set number of years, say 3 to five years. 

When you make the last payment in the last month, the car is yours to own. Compared to a PCP agreement, the monthly repayment amount for Hire Purchase is higher. But the good thing about this is that at the end of the agreement, you own the car. There’s no need to pay any “balloon payment” like in PCP. Go for this type of car finance if you want the car to be yours eventually and if you can afford the monthly repayments. 

Let Carmoola Help!

Still unsure how best to finance your car? Carmoola can help you. Check out our blogs for other helpful and informative articles that you can read. We cover everything about car financing.

Also, Carmoola offers simple and efficient online car financing. Just download the app and follow the steps to apply. Within minutes, you’ll know if you can get car finance with us!

If you have any questions for us, feel free to reach out! We'd love to help! 😀