How Does Car Financing Work? Everything You Need To Know

You may have heard how easy it is to get a car on finance and that you can even get one without paying a penny upfront. But, have you ever asked yourself how does car financing work? And what type of deal should you aim for? In this guide, we’ll explain everything from the different types of car finance available through to how much you might expect to pay. 

How Does Car Financing Work?

Car finance is a way to pay for a car without having to pay the full amount upfront. The finance company lends you money, which you repay over time. You can either pay in monthly instalments or in one go. The loan will be secured against the car you are buying – if you don’t make your payments, the lender can repossess it.

Car finance is usually split into two stages: paying off your deposit, then making monthly repayments until the end of your agreement (usually between two and 5 years). However, there is also a third payment where any outstanding payments are made so you can own the vehicle. 

What Types Of Car Finance Are Available?

Once you’ve decided on the car finance product that best suits your needs, it’s time to choose a car. If you have ever asked yourself ‘how does car financing work?’ it’s worth noting which car loan products are available to you. There are several types of car finance arrangements to pick from, which we shall go over below. This will give you the essential information that will help you understand how it all works. 

A personal contract purchase (PCP) is a type of car loan where you pay an initial deposit, then make monthly payments until their final instalment at which point they own their car outright.

With personal contract hire (PCH), you pay an initial deposit and then make monthly payments until the contract expires, then you simply return the vehicle.

If you want even more flexibility with your vehicle payments, consider hire purchase (HP). With this type of agreement, buyers make rental-style monthly payments for several years before owning their vehicle outright at the end of the term.

How Do I Get The Best Deal On Car Finance?

Here are some of the best places to find your ideal car on finance deal:

  • Price comparison websites
  • Getting a personalised quote
  • Getting pre-approval
  • Comparing interest rates
  • Comparing monthly payments
  • Comparing deposit amounts required to secure the finance agreement, and how long you need to keep it in your possession before you can take ownership of the vehicle (this is called ‘ballooning’)
  • Comparing insurance costs (if applicable)
  • Add-ons such as paint protection or a service plan

Which Finance Product Should I Choose?

There are many different types of car finance, so it’s important to understand each one. You need to know what they involve, what their pros and cons are, and how much they’ll cost you in total.

There are three main types of products available: personal contract purchase (PCP) deals, hire purchase agreements, and traditional loans. Below, we will go into each car finance product in detail. We hope this will help you to choose which finance product is best for you when you make a car finance application with us.

What Is A PCP Agreement And How Does It Work?

A Personal Contract Purchase agreement is a type of car finance agreement. It’s a contract between you and the lender in which you lease your car for a period of time, during which you make monthly payments based on the depreciation of that vehicle. At the end of this time period, you can return the vehicle, swap it for another car or purchase it for an agreed sum.

Pros:

  • You’ll have lower monthly payments because you pay the projected value of the car at the end of the agreement. You pay this instead of having a fixed amount that doesn’t change no matter what. This means there are fewer fees involved when compared with other methods. For example, buying outright or getting another loan through an institution like a bank (which will want its own money back).
  • Because PCP agreements tend to have longer terms than other types of loans (upwards of three years), it may be easier for people who don’t have large savings accounts. 

What Is A PCH Agreement And How Does It Work?

Personal Contract Hire (PCH) is an agreement between you and the car dealer that lets you buy a new or used car on finance. You pay off the loan in monthly repayments for an agreed period of time.

Because it has ‘hire’ in the name, it’s a long-term rental agreement. If you’re not wanting to buy or own the car at the end of your agreement contract, this is a great car finance product for you. 

The advantages of buying via PCH include:

  • Most finance companies offer the option of including maintenance fees in your monthly payments- you won’t incur any hidden fees.
  • It’s easy- you don’t have to think about the outcome of paying off your loan. It’s already agreed upon between you and your lender.
  • The monthly repayments you make are typically cheaper than if you decided to buy your car at the end of your agreement

Like with any car finance agreement, there are some things to bear in mind. For example, with PCH agreements, you are limited to agreeing to a mileage limit when you sign your contract. Should you wish to stop the agreement or change it, you will need to contact your finance provider otherwise you may face additional fees.

How Does HP Car Financing Work And What Is It?

A Hire Purchase contract is a type of finance agreement that allows you to pay a deposit and then make monthly payments. Once you have completed the contract, you will become the legal owner of the car. 

You’ve probably heard of HP if you’ve ever bought or leased a car. However, not all HP contracts are the same. There may be differences due to which car you choose and the length of the finance contract you take on.

Fortunately, there are no mileage restrictions with HP financing. Because at the end of your contract, you are usually allowed to keep the car. Due to this reason, you typically pay higher monthly payments because you are paying for the value of the car itself.

Should I Buy My Car On Finance And Pay Monthly, Or Pay In One Go?

The best option for you depends on your personal circumstances. For example, if you don’t have the money upfront. Plus, if you would like to spread out the cost of your car over a longer period, then financing it is the way forward.

If on the other hand, you can afford to pay off your car in one go, then buying outright may be best. But, if you want some breathing room in case of an emergency (like losing your job), then using car finance could be more beneficial.

Ideally, it’s always best to try and save for as long as possible before purchasing anything on credit. This way, there’ll never be any pressure from creditors, and you will be able to make repayments on your vehicle.

Understand Each Agreement So You Get The Best Deal

There are many different types of car finance, but if you know what each involves, you can make sure you get the best deal possible.

When choosing a finance product for your new car, it’s important to understand which type of agreement suits your needs and lifestyle. There are various repayment options available and this will depend on multiple factors. For example, how much money you want to put down as a deposit as well as how much money you would like to borrow overall. Some finance providers offer special deals for first-time buyers. So bear this in mind when comparing offers from different lenders. Luckily, our brokers can help you find the best deal for you. They will take all the information you provide to help you get the most out of your car finance deal.

Choosing the right finance option can be a daunting task, especially when faced with so many different products on offer. However, it’s worth spending some time researching before settling on one option over another. After all, there are plenty of things to consider when searching for the right kind of car financing. 

Luckily, if you are unsure even after researching, our passionate team members can guide you through the process of applying for car financing. 

In Summary

We hope to have answered the question ‘how does car financing work?’ in our guide here. we aim to keep you informed to help you make the best decision.

There are many different types of car finance available and it can be difficult to know which is the best for you and your circumstances. Knowing what each involves, then making an informed decision will be much easier.

The most important thing when choosing a finance agreement is finding one that suits your needs. Don’t rush into anything until you have all the facts so that you don’t end up paying more than necessary!

Our team can help you find the best deal by guiding you through the car finance application process. Plus, they could help you secure a car that is best for you, at a rate you can afford.

Want to find out more? Apply for a quote today!

Looking For First-class
Financial solutions?

Get a Free Quick Quote.

Applying with us takes less than 60 seconds. We could get you on the road in a matter of days!

Rates from 10.9% APR. Representative APR 19.9%