Buying a new car involves a big expense, and it’s quite common for those who need a vehicle to not have all the money up front. This is where auto financing could be an option.
There are different ways to borrow money for a new car, including different loan types and the option of leasing a vehicle before choosing whether or not to buy it in full at the end of the term. This guide will help you decide which car buying approach would be best for you.
It will contain explanations on:
How does car financing work?
Can’t afford to pay the full purchase price of a vehicle upfront? Car financing involves borrowing money from a lender to get behind the wheel, allowing you to spread the cost over a set period of time.
How this loan is structured will depend on whether the car is new or used, and whether you own it from the start, or lease it, or actually lease it with an option to buy later.
The amount of auto finance reimbursement will depend on the cost of the vehicle you choose, the length of the agreement, and the interest rate you are charged.
In some cases, car financing can be approved on the spot, while in other cases it can take a few days as the lender must perform financial capability checks.
What types of car financing are there?
There are different types of financing, including used car deals, to help you buy new or used cars. There is no single best type of auto finance, as the different loans available suit people in different situations.
These types of car financing are as follows.
A car loan, or logbook loan, is a financing product taken out specifically for the purchase of a vehicle. If you don’t maintain the refunds, which are guaranteed on the car, you will lose it.
These loans can be offered by a specialized lender or by the dealership itself. Some unsecured personal loans may also be an option. A deposit is not required in either case.
If you want to get a personal loan, here we explain how personal loans work.
If you are buying a used car, hire purchase is the most common form of financing you will be offered, although PCP may also be available to you, as explained below. It is also available for new cars.
With hire purchase, you don’t own the car until you make the final payment. Instead, you typically put down a deposit, often 10% of the car’s price, with the finance company and then make fixed monthly repayments.
At the end of an agreed period, you pay a transfer fee to have the car transferred to your name. It’s up to you then. The level of the commission is fixed at the start but depends on the lender.
Purchase of personal contract
Purchase of personal contract (PCP) is an increasingly popular way to get behind the wheel of a new car as the monthly costs can be lower than other types of loan. And again, there is the possibility of owning the vehicle in full ownership at the end of the loan agreement.
As with hire purchase, you make a down payment and then make monthly repayments. After that, however, there are important differences.
- The loan that will be granted to you does not correspond to the total purchase price of the car. Instead, it’s calculated based on its projected resale value at the end of the term, based on an annual mileage forecast.
- This value, along with your deposit, is then subtracted from the purchase price to determine the loan amount.
- At the end of the term of the loan, you will have the option of making what is called a “lump sum payment”. This is a final payment based on what the dealer thinks the car is worth now, to keep the car.
- If you don’t want to pay that, as long as you’ve met the mileage allowance and haven’t damaged the vehicle, you can simply return the car to the dealer after the rental term has elapsed and drive away.
You will have the option of making the lump sum payment or returning the car (you may be able to get some money to exchange it for a new PCP contract).
Until you make this payment, the finance company owns the car and you are the registered owner.
Leasing (personal rental contract)
If you don’t mind owning a car, you might consider renting one. Renting a car is like renting anything else – you don’t own it, even at the end of the term.
You can lease a new vehicle through a car dealership or financing provider. The price you pay will depend on the make and model of car you choose, as well as the number of miles you commit to driving each year.
The leasing company budgets to sell the car after you’re done with it, so the price you pay each month will be set to account for depreciation – the reduction in value of the car over time.
Service and maintenance are included in the price you pay for the car, but you’ll have to meet an agreed mileage per year or pay an additional fee.
In some cases, you will be able to get 0% financing when using auto finance, which means you won’t incur any interest on the loan. Instead, you only repay what you borrowed. These offers may be offered by dealers.
These deals are only available to those with very good credit scores, and usually on new cars that a dealer is trying to get rid of quickly. So always make sure you’re happy with the car, as well as the loan, before agreeing.
A 0% shopping credit card may also be available for those with the best credit ratings who need a high credit limit to purchase a car. However, not all car dealerships accept credit cards, so you will need to check if this is an option for you.
And these 0% offers are time-limited – often up to around two years – so you’ll need to figure out how much of the loan you can pay off by then, or have the option of transferring the debt to another product. .
See here for our roundup of the best 0% credit cards.
What’s the best way to finance a car?
There is no best way to buy a car, as your decision will depend on factors such as the make and model you want, your finances and the number of miles you will be driving.
The bottom line is that you get affordable auto financing that’s right for you and gives you the flexibility you need. The best auto loans are those that offer this.
The table below presents the characteristics of each type of financing.
|Personal loan*||Credit card||Car loan||credit agreement||PCP||Rental|
|You need a deposit||No||No||Probably||Probably||Probably||Probably|
|You immediately own the car||Yes||Yes||Not if the auto loan is secured on the car.||No||No||No|
|You own the car after all||Yes||Yes||Yes||Yes||Only if you make a final lump sum payment||No|
|You are charged if you exceed a mileage limit||No||No||No||No||Yes||Yes|
|You can sell or change your car whenever you want||Yes||Yes||No, unless you have an unsecured “car loan”, which is actually a personal loan. With a ‘logbook loan’ you cannot sell the car until the debt is paid.||No||No||No|
Is it easy to get auto financing?
Getting auto financing is usually quick and easy, but you’ll need to pass a credit check and prove your identity. You may need a document such as a passport or driver’s license and in some cases you may be asked for proof of income.
Make sure you have pay stubs, bank statements, and documents proving your address history to help with the process.
Can I get car financing with bad credit?
If your credit score is low, it may be difficult to be accepted for car financing.
Checking your credit report using free services like Credit Karma will keep you up to date on your score and alert you to any potential issues that could derail your application.
Paying your bills on time and being on the voters list will improve your chances, while missed loan payments will negatively impact your credit score, making borrowing more difficult in the future.
Read this article for more information on improving your credit score.
If you have a bad score, you can delay the purchase and try to improve your credit rating, or you can search for lenders who will accept you anyway.
For example, comparison site Moneysupermarket works with car finance specialists for people with bad credit. You are likely to pay more interest if you have a bad score, so offers will be more expensive.
How much does car financing cost?
The cost of car financing depends on the type you choose, your credit history and the down payment made up front.
The diversity of circumstances makes it very difficult to answer the question “What is a good car finance rate?” » Interest personal contract purchase rates start at around 4%, while personal loan rates can be as low as 3.7%.
Be sure to consider all costs when comparing different types of financing.
You will repay the amount you borrowed, the interest rate on the loan, and any other fees. And in some cases you will have to return the car in the end, and in others you will end up owning it.
For another way to save money on autos, check out How to Get Cheap Auto Insurance.
Is car financing worth it?
The cheapest way to buy a car is always to pay for it in advance, or with a 0% credit card (as long as you can pay it off within the free period, and the concessionaire accepts it).
However, not everyone has the savings or credit record to do so.
For this reason, car financing will be vital for many. What’s important is that you research the option that works best for you and understand exactly the terms of the deal before you commit and drive that car off the court.