Second-hand car finance

Picking the right second-hand car can feel like a challenge, but finding the right used car finance needn't be. Here are your options

John Evans
Apr 29, 2020

Pretty much all cars lose value as they get older. New car buyers pay top dollar and then the car plummets in value as the miles rack up - meaning those buying used get much more for their money. This is called depreciation and is why used cars are cheaper than new ones - both for those financing their car and cash buyers.

New cars typically lose up to 35% of their value in the first year - meaning that buying a one-year old car can be a great way to get a nearly-new car for a rock bottom price - and by the third year many cars are worth as little as 45% of their price new or less. To put that into numbers, this means a car that cost £20,000 new could be worth £13,000 after one year and then just £9,000 after three years.

While this is very bad news for new car buyers, it's fantastic for those buying - or financing - used cars, as even nearly-new cars can cost a fraction of the price - or monthly payment - of a new equivalent. Since modern cars last much longer than those from decades back, you can rest assured that a three-year old car has plenty of life left in it.

If you're used to buying a second-hand car with cash and have been seduced by the idea of financing a new car but can't stretch that far - or simply don't want to spend many hundreds of pounds every month - used car finance could be the answer. 

Not only does that mean you can get low monthly payments with a car loan or Hire Purchase scheme - where you own the car once you've made all the monthly payments - but you can shrink your instalments even further with used car PCP finance.

This means you could get a newer or better specification car for your monthly budget with PCP. Keep reading to understand your used car finance options and to get to grips with whether PCP or Hire Purchase suits your needs and take a look at the video below to get a good idea of which finance option is best for you.

Second-hand car finance: what is PCP?

Unlike a loan or Hire Purchase (HP) scheme, with PCP your monthly payments only cover the value the car is expected to lose over the length of the contract - the depreciation - meaning lower monthly payments on the same car with PCP than HP. And, if you want to own the car, you then make the optional final payment - what the car is predicted to be worth at the end of the contract.

Contracts typically last between two and four years and you can choose the deposit you want to put down and select the mileage you expect to cover. You can typically reduce your monthly payments by putting down a larger deposit, going for a longer contract - as, on average, the car should lose less value per month - or by sticking to a lower mileage limit.

Beware, however, that if you pick a low mileage limit and exceed this, you'll be issued with a per-mile charge at the end of the contract, if you choose to hand the car back.

Your options at the end of the contract are either to make the optional final payment - also known as guaranteed future minimum value - to buy the car, 'part-exchange' it for a new one - using any equity in the car, should it be worth more than the remaining finance balance - or hand the keys back and walk away.

Provided you've stuck to the mileage limit and the car's in good condition, there should be nothing more to pay if you give the car back. Whether it’s a new or used car, a PCP works the same way.

Why is PCP finance popular with used car buyers?

As used cars have already lost a large proportion of their value compared with what they were worth new, used car PCP finance is particularly affordable. Not only are used cars' cash prices much lower, but they lose value at a slower rate.

Since PCP monthly payments cover the difference between a car's value at the start of the contract and the end, this means that going for used car PCP finance can be much more affordable than taking out a contract on a new car equivalent.

Not only that but if you are interested in owning the car at the end of the contract a used car's optional final payment - the amount needed to buy it at the end of the contract - may now be so low that buying it could be a much more realistic proposition than if you financed a new car.

It's this combination of low monthly payments and the same flexibility as new car PCP that makes this type of finance so popular with those looking to finance a used car.

Is used car PCP finance better than a loan or HP?

A used car is always cheaper than a new one, so regardless of what finance method you use, you can always expect to pay less for it in monthly payment terms.

However, if you're looking for the lowest monthly payments - or to get a more valuable car for the same monthly payment - PCP is a better option than a personal loan or Hire Purchase. Just remember, that while you would own the car at the end of the contract with the loan or HP, you'd still have to make the large optional final payment to be in the same position with PCP.

Another benefit for PCP over a loan, is that it is a form of secured borrowing (basically, it’s tied to the car and the finance company can use this as security, should you miss your payments), meaning that interest rates are often lower than with unsecured personal loans, where the finance company has to work harder to get its money back, if you fail to make your payments.

Also in favour of a PCP is the greater flexibility at the end of the contract; you can pay the final amount to own the car, easily part-exchange it for a replacement model or hand the keys back and walk away. Hire Purchase and loans are set up so that you own the car automatically, so if you don't want it anymore you'll have to actively sell it or trade it in. 

There’s also the option to hand the car back to the finance company before the end of the contract with PCP - should your financial situation change drastically and you can no longer afford payments, for instance - although that's only allowed when you have paid at least 50% of the total finance balance.

Second-hand car finance: PCP vs loans

Depending on the type of loan, many factors - including your credit rating - influence how much it costs. However, one thing’s for certain: because monthly payments cover the whole value of the car - compared with PCP finance, where they only cover the amount of value it loses over the length of the contract - a loan will cost you more per month than a PCP finance deal.

The examples below show how much cheaper. The PCP deals quoted are correct at time of writing for typical cars available on BuyaCar, assuming a four-year contract, £0 deposit and 8,000-mile-per-year limit. The loan examples are assuming the best rates available at the time of press, with a four-year contract and £0 deposit.

Car valuePCP                     Loan
£5,000£95/month          £111/month
£10,000£164/month        £221/month
£15,000£224/month        £331/month
£20,000£287/month        £441/month
£25,000£348/month        £552/month
£30,000£429/month        £710/month

 

You can see that as the value of the vehicle rises, so does the case for a PCP over a loan - with PCP monthly payments proving notably more affordable than the loan repayments. For example, a £5,000 car is £16 per month less on PCP than loan payments on a car of the same value, while at £30,000 that rises to £281 per month or a 40% difference.

These differences in monthly payments could mean the difference between having an older car with a higher mileage (if you take a loan), or a newer one with fewer miles (should you use PCP). If you are concerned about owning the car at the end of the contract, however, remember that with PCP you would then have to make the optional final payment to take ownership once all the monthly payments are made.

Second-hand car finance: what should I watch for with PCP?

Used cars such as some upmarket, in-demand models from BMW or Audi, may have high prices to begin with, but because they are very valuable as used cars, they could cost less than you might think in PCP monthly payments.

That's because the car you hand back at the end of the contract is still very valuable. So don't think they’re beyond your budget. As a result, it's always worth getting like-for-like finance quotes on a selection of cars to see which offers you the lowest monthly payments.

To avoid any end-of-contract charges, be realistic about about how many miles you expect to cover over the contract. Choosing a lower mileage allowance may shave off a few pounds every month, but if you go thousands over, you can expect to be issued with a bill which could amount to thousands of pounds when you hand the car back.

It's a similar story if you damage the car. Fail to keep it in good condition and you can expect to be charged for the finance company to repair the car when you give the keys back. This is not an issue, however, if you make the optional final payment to buy it.

Second-hand car finance: make it work for you

A used car on a PCP that was previously a new car financed the same way can be a great option to choose, as just like you have to keep the car in good condition, so did the previous owner. One thing to bear in mind, however, is that if there is any notable damage to the car at the start of the contract, it's worth flagging this, so that you don't get charged for it when you hand it back.

While some upmarket, desirable cars can prove good value on PCP - as they're very desirable when you hand them back, cutting your monthly payments - less desirable cars that plummet in value quickly from new can be a bargain to finance. While they might continue to lose value quickly over your contract, if they're worth little to begin with, the overall amount of value they lose - what your PCP monthly payments cover - is still small.

 

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