Car finance and how it works

Car finance can seem overwhelming. We’ve put together this guide to show you the different options, and how to stick to your budget when buying a car on finance


By Marmalade Author

Updated on Aug 4th, 2022

The world of car finance can seem overwhelming. Yet with more and more people opting to buy cars this way, knowing what it all means and how car finance works is really important. We’ve put together this guide to show you what the process involves; what options there are, which finance plan might best suit you, and how to keep within your budget.

What does buying a car on finance mean?

We’ll explore the different types of finance further on, but in essence what it means is that you are not buying your car outright using your own cold, hard cash. There could be many reasons as to why you choose the finance route, including not having enough disposable money to buy outright or wanting a newer and safer car than your spare cash allows you to buy.

Why are there different types of car finance and what do they mean?

This is the bit that probably causes prospective car buyers the biggest headache, so we’ll try and break it down as simply as we can:

Personal Contract Purchase (PCP) means that you essentially lease a brand new car for a term of (generally) 2 to 5 years. You pay a monthly amount for the term of the contract and at the end, you can buy the car outright with a final ‘balloon’ payment which is calculated at the start of your agreement, or you hand the car back and either walk away or get a new PCP vehicle.

If you’re not sure whether you will want to own the car outright, or hand it back, then this is a great option that leaves that decision open until the end of your contract.

Hire Purchase is also a type of ‘lease’ contract where – like PCP – you don’t own the car for the duration of the contract but are the registered keeper. Hire Purchase payments tend to be slightly higher than PCP, because at the end of the term you will have paid off the cost of the car and own it outright.

If you have found your perfect motoring match and know that you’ll want to keep the car past the term of your Hire Purchase, then this could be the finance option for you.

Loans and Credit Cards from your bank or building society are a way to buy the car outright from the start, then make repayments to your loan provider. You may be able to negotiate a better price for the car from the dealership because you are essentially a cash buyer. It’s worth noting that if you’ve not got an excellent credit score then you’re likely to either not be offered a loan, or be offered pretty high interests rates.

Please be careful with credit cards – putting the loan on a 0% card may sound like a great deal, but these tend to only give a short repayment term and after that, the APR can go sky high if you’ve not paid it all off.

I’m not sure what to do – who can help me decide?

We would always recommend that you have a good chat with your parents or a trusted family member before making this big financial decision. They can help you weigh up the pros and cons of each option and if you’re still unsure, then the Money Advice Service is a great source of professional, impartial advice.

I’ve never had finance before – will I be accepted?

The offer of finance is based on individual circumstances, so we can’t tell you in this article whether you will be accepted. If you’re looking for a new car, then the best thing to do is work out an affordable monthly repayment amount based on your income and monthly outgoings, then search around for a plan that suits you. It may be tempting to stretch yourself to get a ‘better’ car, but please don’t forget that if you don’t pay each month then your car may be repossessed and you could end up with a default on your credit score. This can lead to further complications for years to come, so is having a slightly more exciting car that you can’t actually afford worth the risk? We don’t think so!

You can browse the sorts of cars that are available at Marmalade based on your age (finance is only available if you are aged 18 or over) and location, then do a full application to check whether you’re likely to be accepted for finance. Don't worry if you're not eligible for finance, an application can be made by a parent or guardian!

If you decide to go down the bank loan or credit card route, then speak to your bank and others to compare the options available to you and make a fully informed decision.

Should I buy a new car on finance, or an older car outright?

This really is a personal choice, but it’s worth keeping in mind that the safety features on cars evolve and improve frequently. A brand new car will undoubtedly have additional safety features to the same model say 10 years ago; whether these come in the form of intelligent technology to help pre-empt and avoid an accident, additional air bags or improved crumple zones should a crash occur. The fact you are paying monthly and have a brand new car could also help you manage the running costs more easily, with no need to MOT a car that’s under 3 years old and lower general maintenance costs.

You should always buy within your financial means, but the newer the car, the safer you are likely to be - that’s something that you can’t put a price on!

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By Marmalade Author

Providing tips and advice for young drivers on all aspects of driving - from getting through the driving test to buying and running your first car.

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