Car finance explained
Rates from 9.9% APR. Representative APR 19.2%. Smooth Car Finance is a credit broker, not a lender.
Learn about HP, PCP and personal loans to find the perfect solution
What is car finance?
Car finance is a popular method for purchasing a vehicle without paying the full amount upfront. It allows you to spread the cost of a car over monthly instalments, making it a practical and budget-friendly solution for many.
Car finance can be a great way to get behind the wheel of your dream car, but it's important to weigh the pros and cons carefully. Here's a more detailed breakdown:
Pros of car finance
- Affordability: Lower monthly payments compared to a traditional loan or outright purchase.
- Quick approval: Often a faster process than traditional loans, allowing you to drive away sooner.
- Flexibility: Various finance options to suit different needs and budgets.
- Tax benefits: In some cases, business car finance can offer tax advantages.
- Improved credit score: Consistent, on-time payments can positively impact your credit history.
Cons of car finance
- Higher total cost: Due to interest charges, you'll typically pay more over the long term.
- Ownership restrictions: With PCP and HP, you don't own the car outright until the final payment is made.
- Early termination fees: If you decide to pay off the loan early, you may incur penalties.
- Mileage and condition restrictions: Lease and PCP agreements often have strict mileage and condition limits.
- Potential for negative equity: If the car depreciates faster than the loan balance, you may owe more than the car is worth.
Key Considerations:
- Interest rates: Higher interest rates can significantly increase the total cost of the loan.
- Hidden fees: Be aware of any additional fees, such as administration fees or early termination charges.
- Credit score: A good credit score can help you secure better interest rates and terms.
- Future plans: Consider your long-term plans, whether you want to own the car or lease a new one every few years.
- Financial situation: Assess your budget and ensure you can comfortably afford the monthly payments.
What are the different types of car finance?
Personal contract purchase (PCP):
- How it works: You make regular monthly payments and, at the end of the agreement, you have three options:
- Make a final payment (balloon payment) to own the car outright.
- Return the car to the finance provider.
- Part-exchange the car for a new one.
- Best for: Those who want to own the car at the end of the term or upgrade to a new vehicle.
How does PCP work?
Let’s say you’re interested in a £20,000 car and opt for a 4-year PCP deal.
One of the first steps is to estimate your annual mileage. If you agree to a 10,000-mile annual limit, you’ll need to factor this into your agreement.
Next, you’ll need to decide on a deposit. The more you put down (e.g. £2,000), the lower your monthly payments will be.
The lender will calculate the car’s estimated future value (GFMV) at the end of the agreement. If this is £6,999, you’ll have three options at the end of the term:
- Pay the GMFV: Own the car outright.
- Part-exchange: Trade the car in for a new one.
- Return the car: Simply return the car to the finance provider.
Given these factors, here’s a potential breakdown of your monthly payments and total cost:
Car value: £20,000
Deposit: £2000
Amount to finance: £18,000
Amount of Interest: £3,975
APR: 7.9%
Term: 48 months
Monthly repayment: £312
Annual mileage: 10,000
Balloon payment: £6,999
Total amount repayable (with balloon payment): £28,974
Total amount repayable (without balloon payment): £21,975
*Note: The APR you're offered will be dependent on your credit rating and the lender you're borrowing from.
Hire purchase (HP):
- How it works: You make regular monthly payments, and at the end of the agreement, an “option-to-purchase” fee will entitle you to own the car.
- Best for: Those who want to own the car outright and prefer a fixed monthly payment.
How does HP work?
Let’s say you want to buy a £20,000 car using a 4-year Hire Purchase (HP) agreement. You put down a £2,000 deposit and are offered an APR of 15%.
Here’s a breakdown of your potential monthly payments and total cost:
Car value: £20,000
Deposit: £2000
Amount to finance: £18,000
Amount of interest: £6,045.60
APR: 15%
Total repayable: £26,045.60
Term: 48 months
Monthly repayment: £500.95
Car owned at the end of agreement? Yes
*Note: The APR you're offered will be dependent on your credit rating and the lender you're borrowing from.
Lease (contract hire):
- How it works: You make regular monthly payments for the use of the car. At the end of the agreement, you return the car to the finance provider.
- Best for: Businesses or individuals who want to drive a new car regularly without the hassle of ownership.
Personal loan:
What is a Personal loan?
A personal loan is a type of unsecured loan that allows you to borrow a fixed amount of money over a set period. Unlike car finance options like PCP or HP, a personal loan isn’t secured against the car itself. This means you own the car outright from the moment the dealer receives the funds.
Pros of a Personal loan:
- Negotiation power: Having pre-approved finance can strengthen your negotiating position with car dealerships.
- No repossession risk: The car can’t be repossessed as it’s not used as collateral.
- Flexibility: You can sell the car at any time without needing permission from the lender.
- Fixed payments: Consistent monthly payments make budgeting easier.
- Broader choice: You can buy from any dealer or private seller.
Cons of a personal loan:
- Credit score impact: A poor credit history can limit your options and lead to higher interest rates.
- Lower loan limits: Personal loans typically have lower maximum loan amounts, often around £25,000.
- Limited dealer checks: Lenders may not conduct as rigorous checks on dealerships as with car finance options.
How does car finance work?
- Choose a vehicle: Select a car that fits your budget and preferences—new or used.
- Select a finance option: Decide on a financing plan, such as HP, PCP, leasing or a personal loan based on your goals.
- Make a deposit: Depending on the agreement, you may pay an upfront deposit (typically 10-20% of the car’s value).
- Pay monthly instalments: Spread the remaining cost over fixed monthly payments over an agreed term, usually 12-60 months.
- End-of-term options: Depending on finance agreement at the end you may own the car outright, return it, or trade it in for a new model.
Why choose car finance?
- Drive your dream car sooner:
Car finance removes the barrier of saving for years before purchasing, allowing you to drive your desired car right away. - Tailored payment plans:
Flexible options let you customise your deposit amount, term length, and monthly payments to fit your budget. - Low initial costs:
Many agreements offer low or no deposit options, making it easier to get on the road quickly. - Upgrade opportunities:
With PCP or leasing, you can easily trade in your car for a newer model at the end of the term. - Preserve savings:
By financing your car, you avoid depleting your savings and can keep funds available for other important expenses or emergencies.
Choosing the right car finance option
The best car finance option for you will depend on your individual circumstances, including your budget, driving needs, and long-term goals. Consider factors such as:
- Monthly budget: How much can you afford to pay each month?
- Vehicle usage: How often do you drive, and for what purpose?
- Future plans: Do you plan to keep the car long-term or upgrade regularly?
Tips for getting the best car finance deal:
- Shop around: Compare offers from different lenders to find the best interest rate and terms.
- Improve your credit score: A good credit score can help you secure better deals.
- Consider a larger deposit: A larger deposit can reduce your monthly payments.
- Negotiate: Don't be afraid to haggle with the dealership to get a better deal on the car price.
By understanding the different car finance options and considering your individual needs, you can make an informed decision and secure the best deal for your next car.
What do I need to apply for car financing?
To make an application for car finance, we need very little data:
- Full name and diving licence
- Employment details
- Residential status and address
- Mobile number and email address
You have to be between 18 and 75 years old, be a UK resident for at least 12 months, and receive a monthly income of at least £1,000.
Car finance loan calculator
*Please note that if you proceed with your quote, a hard credit check will be performed, which may affect your credit score.
Representative example: borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. We compare multiple lenders to help find the best rate available from our panel and offer you the best deal you're eligible for. We earn a fixed or percentage-based commission on the finance agreement, which will not affect your interest rate or total repayment amount. The full commission details will be provided in the commission disclosure document before proceeding with the finance agreement.
HOW IT WORKS
Our Process Is Simple...
Tired of complicated, time-consuming finance processes? We make it quick and straightforward with our three-step approach:
Apply and get approved
Approval takes just minutes. Complete our simple online application, we’ll instantly compare rates and aim to find the best deal for you.
Choose your car from any dealer
Whether you’ve already found your dream car or need help sourcing it, we’ll manage everything for you, from dealer communication to thorough vehicle checks, ensuring a seamless buying experience.
Hit the road in no time
Once the paperwork is sorted, it’s time to collect (or have delivered) your new car. Getting behind the wheel has never been easier.
Frequently Asked Questions
What is the difference between PCP, HP, and a personal loan?
PCP (Personal Contract Purchase): You make monthly payments for a fixed term, and at the end of the agreement, you have three options: pay a balloon payment to own the car, return the car, or part-exchange it for a new one.
HP (Hire Purchase): You make regular monthly payments and, at the end of the agreement, you own the car outright. It’s a simple way to spread the cost of the car over time.
Personal Loan: This is an unsecured loan that lets you borrow a fixed amount of money to purchase the car outright. The car is yours from the moment the loan is paid to the dealer, and there are no restrictions on mileage or condition.
How is the interest rate determined for my car finance?
The interest rate on your car finance will largely depend on your credit score. A higher credit score typically results in a lower interest rate, while a lower credit score may lead to a higher rate. The rate is also influenced by the type of finance agreement (PCP, HP, or personal loan), the length of the term, and the lender you choose.
Can I choose any car with car finance, or are there restrictions?
You can typically choose any car that fits within your budget, whether it’s new or used. However, if you’re opting for specific finance agreements like PCP or lease, the lender may have certain restrictions regarding the car’s age, condition, or value. It’s always best to check with your lender to ensure your chosen car is eligible.
What should I consider when deciding on the loan term for car finance?
When choosing a loan term for car finance, consider:
Monthly budget: A longer term may reduce monthly payments but increase the total amount repayable.
Total cost of credit: Shorter terms typically mean less interest paid overall.
Future plans: If you plan to upgrade regularly, a shorter term or PCP might be more suitable.
Make sure the loan term aligns with your financial situation and vehicle needs to avoid stretching your budget too thin.
What happens if I want to pay off my car finance early?
If you want to pay off your car finance early, it’s possible, but early termination fees may apply. These penalties depend on the type of agreement you have, such as PCP or HP. It's important to check the terms of your agreement to understand any charges before deciding to settle early.