Everything You Need To Know About Car Finance: Ask The Experts

If paying for your next car with cash isn't an option, here's everything you need to know about car finance – what it is, how it works and where to apply.

Have you found the perfect new or used car but aren’t sure how you’ll afford it? It’s not an unusual situation for anyone buying a vehicle to be in. You can pay for it with cash, but can you find the amount you need – or will you have to raid your savings? And how will it affect your other finances? One solution could be to look at the car finance options open to you.

The idea of getting a car on finance might seem daunting at first, but it shouldn’t be. Our trusted experts are on hand to help take the mystery out of car finance, making it much clearer and easier to understand. Learn more about the various vehicle finance options, how they work and – crucially – whether it’s the right option for you.

What is car finance?

When buying your next car, you can self-finance it by paying up front – either with your savings, a credit card or by taking out a personal loan. If this isn’t possible, one alternative is car finance (or motor finance). This is a type of credit agreement secured against the car you’re buying that lets you spread the cost over a number of months. 

Like any other form of borrowing, car finance is a safe way of paying for a vehicle – so long as you keep up with your repayments as agreed each month. And you can only use car finance to spread the cost of your next vehicle. Bear in mind that, because this is secured against the vehicle, you could lose it if you don’t stick to your repayments.

Why do I need car finance?

Buying a car – new or used – is an expensive business. Unless you’ve been saving up for some time, or have experienced a recent windfall, the chances are you don’t have the spare cash to afford your next vehicle outright – even though it means you’d own it yourself from the outset. Much like using a mortgage to buy a house, car finance spreads the cost of a car.

How does car finance work?

Self-finance is one way to meet the cost of your next car purchase, whether it’s in the form of a personal loan or using a credit card. Depending on how much you borrow, interest can make these car finance options more expensive in the long run. So, for new and used cars, one or more of these motor finance options could be the solution:

Hire-Purchase (HP): If you choose an HP deal, you’ll pay a deposit up front and then follow it with fixed monthly payments. The lender owns the car up until the final payment is made. An HP agreement may also include an ‘option to purchase’ fee – a voluntary payment at the end of the agreement that ensures the car is yours to keep.

AA Car Finance can help you secure HP car finance. Unlike a personal loan, you can borrow up to £25,000* towards the cost of a car from us. We’ll pay the dealer direct once the sale has been finalised. You’ll then repay a fixed amount each month until the end of the plan.

Miss a payment, however, and the car could be repossessed.

Personal Contract Purchase (PCP): Like a HP deal, PCP car finance means you pay a deposit and fixed repayments each month over the course of 1-3 years. At the end of the term, you can either keep the car, trade it in for an upgrade or return it to the dealer.

If you opt to keep the car, bear in mind you’ll have to make a final ‘balloon’ payment – this is its guaranteed future value (GFV) and is set when you sign the agreement. If you trade in the car, any GFV equity can be used as a deposit for a new car.

Personal Leasing: This is also called contract hire and is similar to PCP car finance. The main difference with this type of motor finance is that you’ll never own the car yourself. You are, for all intents and purposes, renting the car for a set period with an agreed annual mileage.

Who is car finance for?

If you can’t afford to pay for your next car upfront and would prefer to avoid self-financing, car finance is a route chosen by many people. Society of Motor Manufacturers and Traders data shows there were 1,052,202 new cars registered to private UK buyers in 2018 – more than 90% of which were bought on finance, according to the Finance & Leasing Association.

In addition to those 960,000 new cars, nearly 1.5 million used cars were bought on finance in 2018 too. That number – around 20% of the total number of used car transactions for 2018 – might not be as big a share as it is for new cars, but it does show the popularity of getting a car on finance. And the more expensive the vehicle, the more likely this is to be the case.

One thing you must ask yourself before committing to buying a car on finance, however, is can you afford to stick to your monthly repayments? Your finance agreement is secured against the car, and you might lose it if you don’t keep up with your repayments. You might be able to afford it to begin with, but what about 1 or 2 years into your loan term? And how will your repayments affect any other commitments you have: utility bills, food and rent or mortgage?

Am I eligible for car finance?

A quick car finance check will show you whether you qualify for a loan and what the likely Annual Percentage Rate (APR) is. AA Car Finance offers a quick and simple eligibility check, which won’t affect your credit score but will show you who out of our panel of 31 lenders can offer you a loan. All you need to do is enter a few basic personal details.

You must be at least 18 years old and have a permanent UK address.

Can I get car finance with bad credit?

If you have a less-than-perfect credit score, it can feel like a struggle to get car financing. But it’s not out of the question. With AA Car Finance, our partner Evolution Funding looks at your personal circumstances, alongside your credit history, to see what finance options we can offer. To get started, use our online eligibility check and see what deals are available.

How does car finance affect my credit score?

If using our eligibility check in the first instance, we’ll run a soft credit search to give you an indicative rate – based on the amount you want to borrow and your credit history. This won’t impact your credit score or leave a mark on your file. If you choose to apply for a loan once you’ve completed the eligibility check, a hard credit search is run, which will appear on your file.

We’ll only run a hard credit search if it’s absolutely necessary, and we’ll always ask for your permission. To see how we use your details, take a look at our Privacy Policy.

Where can I get car finance?

A high street bank or a dealership are 2 of the more familiar places you can get finance – but you’ll also find many car finance options online. A study by analytics software company FICO showed that, while 63% of UK consumers had got their most recent car loan through a dealer, 48% planned to get their next car loan online.

AA Car Finance is here to help you get your next car on finance. Not only do we cover most UK dealers, we also offer a loan for private car purchases too. Our rates range from 6.9% to 29.9% APR and we guarantee you a decision in minutes from our panel of 31 lenders. If that isn’t enough, you’ll also get free 12 months’ breakdown cover* and a personal advisor.

If you’re not sure about the process, we’ve produced a helpful video that you can watch:

Don’t just take our word for it, though. Nicole is just one of the many satisfied AA Car Finance customers: “It’s such a refreshing change to deal with someone who’s patient, calm, and doesn’t apply too much pressure. I’ve actually really enjoyed the process of working with you to secure the finance for my new car.”

Image courtesy of iStock.

*The free Basic Breakdown Cover offer is only available when a vehicle is purchased through AA Cars and must be redeemed within 12 months. It’s for non-Members only. AA Breakdown Cover is arranged by Automobile Association Insurance Services Limited.

AA Car Finance is a brand style of Used Car Sites Limited. Registered address: Fanum House, Basing View, Basingstoke, Hampshire, RG21 4EA.

Used Car Sites Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 671360). Used Car Sites Limited (trading as AA Cars) is a credit broker which introduces AA Car Finance customers to Evolution Funding Limited. Evolution Funding Limited is authorised and regulated by the Financial Conduct Authority for credit brokerage (firm reference number 669005). Registered address: Thompson Close, Whittington Moor, Chesterfield, Derbyshire, S41 9AZ. Evolution Funding Ltd and Used Car Sites Limited are credit brokers not lenders. Finance subject to status.

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