What is car finance? All your questions answered

How to pay for a car in monthly instalments: the no-nonsense guide to car finance

BuyaCar team
Nov 14, 2018

If you haven’t got the savings to pay for your next vehicle in cash, then car finance gives you the option of spreading the cost into monthly instalments.

This could mean that you can afford the car that you’ve been looking for or upgrade to a better, or more recent model, although you will normally end up paying more overall than if you had paid in cash.

It’s so popular that nine in ten new cars are now sold in this way, according to the Finance and Leasing Association - the industry body.

It also reports that more than 1.4 million used cars were bought on finance in the past 12 months, up by eight per cent, and representing around one in six of all second-hand sales.

 

What is car finance?

Car finance can make buying a vehicle more affordable: you borrow the money needed and repay in monthly instalments. Flexible options allow you to defer some of the cost to the end of the agreement, when you can either return the car or pay the remainder to own it.

The flexibility means that you can choose a type of finance that suits your circumstances. The length of most agreements can be changed, as can the deposit. In many cases, there is a no-deposit option.

Hire Purchase (HP) finance splits the cost of the car into a series of equal instalments, but repayments for Personal Contract Purchase (PCP) finance are usually cheaper because they only cover part of the car's cost: at the end of the agreement you can hand the car back or buy it for the remaining amount.

Most finance agreements charge interest and fees, which are added on to your repayments. These are set out as an APR interest rate. The higher the rate, the more these interest charges and fees will be.

 

Cars available with finance

Virtually any car can be bought with finance, from a little Fiat 500 to a Rolls-Royce Phantom (although you'll need to find a specialist provider if you're looking at a £400,000 Rolls-Royce.

All 63098 cars currently for sale on BuyaCar are available with finance. Cars under five years old are generally available with PCP finance, which brings lower repayments and a range of options at the end. All can also b bought with Hire Purchase finance, so you'll own the car once the last payment has been made.The cost of finance will depend on the interest rate that you're charged. Based on representative examples, which use an interest rate available to the majority of customers and assume a ten per cent deposit, there are 774 cars for under £100 on BuyaCar. With an increased budget of £200 per month, your choice increases to 22922 cars.

 

Types of car finance

Personal Contract Purchase (PCP)

Available for new and used cars, PCP is the most popular type of car finance because of its flexibility and low monthly payments.

Instead of repaying the full cost of the car over the course of the agreement, the monthly instalments only cover the value that the car is expected to lose during the course of the agreement. This is the difference between the cost of the car at the start and the amount that it's expected to be worth at the end - as calculated by the finance company.

It means that you won't own your car at the end, but the arrangement does offer you some options:

  • 1. Return the car. Even if it's worth less than the finance company expected, you won't have to pay anything extra. However, charges will apply for damage that goes beyond expected wear and tear, as well as excess mileage over any agreed limit.
  • 2. Buy the car by paying the remainder of its cost (known as the balloon payment). This can normally be refinanced, allowing you to spread it over another series of monthly payments.
  • 3. Trade it in if it's worth enough. Cars are often worth more than the balloon payment (although this isn't guaranteed), which means that you'll be losing out if you return the vehicle. One alternative is to trade it in for another model at any good retailer. They will settle the finance by making the balloon payment. The difference between this and the car's value can be put towards another vehicle or you can pocket the difference.

More details

Hire Purchase (HP)

Hire Purchase finance is easy to understand because the car's cost (plus interest and fees) is split into a series of equal monthly payments. minus any deposit. You then own the car once the final payment is made. This type of arrangement is for new and used cars, and is also known as Conditional Sale.
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Leasing

Leasing isn't a type of car finance because you don't borrow any money. It works in a similar way, though because you rent the car with a series of fixed monthly instalments and then return it at the end. It's mainly for new cars.
More details

 

What is car finance? More details

We've got an extensive range of advice on a full range of finance options. Click below if you have further questions.

 

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