Quick guide to car finance

Whether you walk in or click through to a dealer, car broker or car supermarket chances are that you’ll soon be bombarded with offers for car finance. Paying for your next car using some form of finance is now far more popular than paying in cash outright. Indeed, it’s become a major source of profit for the motor trade.

With prices in the tens of thousands, you won’t be surprised to hear the vast majority of new car sales are via some form of finance – with the latest industry figures showing over 90% of new car buyers opting for finance.

And it’s not just new cars that are being bought in this way. According to online car supermarket BuyaCar, last year more than 1.2 million used cars were financed for an eye-watering £16.2 billion!

But even when so many people are opting for finance, recent research suggests many motorists are desperate for clearer advice on how to finance a car than they’re getting at the moment.

Remarkably almost 40% of buyers who need finance said they were uncertain about the terminology and jargon used to describe different methods of funding their purchase. And with the Financial Conduct Authority tightening up rules on commissions earned on car finance deals there’s clearly an appetite and an incentive for greater clarity.

To help clear up this potentially complex subject we’ve put together this quick guide to car finance. So, next time you’re weighing up the type of car finance on offer, you’ll find one that’s just right for you.

On that note, if you’re looking for a transparent and straightforward approach to impounded car insurance then give the dedicated team at Insurance Factory a call. We pride ourselves on taking the pain out of arranging the right insurance for your needs and budget.

A model car placed on a pile of coins against a blue background
Types of car finance – the pros and cons

There are three main types of car finance commonly on offer. Which one you decide upon will depend on your own personal circumstances and how you plan to use the car.

You need to ask yourself some important questions first in order to work out what your priorities are and what will work best for you. These could include:
 
  • Can you afford to pay a deposit? And, if so, how much?
  • How much can you afford to repay each month? Are lower monthly repayments important for you?
  • How much are you willing to repay overall? Are you looking for the lowest overall cost?
  • Do you want to own the car outright? And how soon do you want that to happen?
  • Are you happy to just have personal use of a car at an affordable rate?
  • If you’re on a variable rate of interest, can you afford it if the rate rises?
  • Would you like to replace your car often? Or will you be happy to hold onto it for many years to come?
  • How many miles do you expect to drive every year? Would you be comfortable with sticking to a pre-arranged mileage limit?
  • Are you able to pay additional costs involved such as extra insurance or penalty fees for damage?

These are just some of the things to take into account when working out which option to go for. Remember, there are plenty of other ongoing costs such as fuel, repairs, servicing, tax and insurance.

And if you fail to pay your road tax or keep your insurance up to date then your vehicle could be impounded by the authorities.

If that’s the case then you’ll need to arrange impounded car insurance with Insurance Factory to ensure the car’s quick release. Matters can soon spiral out of control if your car is impounded and you still owe money on it.
 

Personal Contract Purchase (PCP)

A popular but sometimes complicated way to pay for your next car is through PCP finance. Many buyers go for this option as they are tempted by the typically low monthly payments over a fixed period.

These monthly payments tend to be lower than other car finance options because they only cover part of the car’s cost (the minimum guaranteed future value or MGFV). The MGFV is the difference between the car’s value at the beginning of the contract term and what it's expected to be worth at the end.

PCPs typically last between two and five years. At the end of which you can choose from several options. You can buy the car outright for a large pre-agreed amount (the optional final payment), return the vehicle with nothing more to pay or even sell it privately to pay off the outstanding amount.

It’s a popular form of finance among people who like to change their car regularly. But be warned, it’s important to stick to the pre-agreed mileage limit and keep the car in tip-top shape. If you don’t you could be penalised.
 

Hire Purchase (HP)

If you’re keen to eventually own the car outright then HP may make sense for you.

While a HP agreement will cost you more per month than an equivalent PCP deal (as there's no large payment at the end) you'll usually end up paying less in interest overall.

This is because you're paying off the balance faster than with a PCP so you'll end up paying less in interest.

As soon as you've made the last monthly payment, the car becomes yours as its cost will have been spread over the series of fixed monthly instalments. Another benefit of HP is that you don't need to find enough cash to cover the large lump sum at the end (which can easily amount to £10,000 or more).

HP agreements such as this typically last between two and five years. And you have to be aware that if you miss a payment your car could be repossessed or impounded. Always carefully check the HP terms and conditions.

A car in a showroom

Personal leasing

Another way to get your hands on a new car is to effectively rent it on a monthly basis. Personal car leasing (also called Personal Contract Hire) is an increasingly popular option that has some similarities to PCP.

You’ll make low monthly payments, but without the option to buy the car at the end of the contract. While it’s convenient and easy to change cars (great for those who like to keep things fresh) you will have fewer consumer rights if you need to end the lease early.

While servicing may be included, you’ll often need to pay a large upfront deposit.
 

0% finance

While you’ll typically need to pay a large deposit (around 35%) for this kind of deal, it can be a very affordable way to get your hands on a car model that a dealer is trying to shift.

Be aware that if you miss payments you’ll usually be shifted onto a different deal with a higher interest rate.
 

Additional extras worth considering

When arranging car finance, be aware that dealers may offer other financial products as part of the package. These can include:
 
  • Gap insurance to cover the ‘gap’ between the current value of your car and the value of your outstanding loan or the cost of replacing your car (if it gets stolen or written off).
  • Minor damage insurance to cover bumps and scrapes which might affect the value of your car when you come to return it at the end of the lease.

Remember to always shop around for additional products like these as you might be able to get them cheaper elsewhere.
 

A note on impounding

Returning to your car only to find out that it has been impounded is every car owner’s worst nightmare.

Unfortunately, if the car is still part of a finance agreement this can become even trickier. If you don’t get the car back quickly enough then it could potentially be disposed of while you’re still liable for any outstanding finance on it!

Or the finance company themselves might decide to collect the car before you do and then charge you for the administrative or legal costs of doing so. What a costly disaster!

That’s why if your impounded car is subject to HP or other forms of finance then it’s vital you act quickly to get your car released. Getting impounded car insurance in place quickly and efficiently could save you a lot of heartache and hassle.
 

Impounded car insurance from the Insurance Factory

Rest assured, if your car is ever impounded, we can help you to get it back on the road as quickly and easily as possible.

Insurance Factory can provide temporary cover for 30 days, allowing you plenty of time to get your car released from the pound and covering you on the road for one month.

Without a dedicated policy like this, you may struggle to get your car back. If you take out a policy with the Insurance Factory, you’ll be given all the documents you need as proof.

No one would ever claim that having your car impounded is a pleasant experience, but we’re here to make it a little more bearable. With our impounded car insurance, you’ll be back on the road in no time.

Get a free, no-obligation quote for impounded car insurance today.

Policy benefits, features and discounts offered may very between insurance schemes or cover selected and are subject to underwriting criteria. Information contained within this article is accurate at the time of publishing but may be subject to change.