What is car finance? Understanding car finance made easy

What is car finance?

Car finance is the process of borrowing money to purchase a car. This is different from car leasing, which is essentially the long-term rental of a vehicle.

What is Hire Purchase?

Hire Purchase is a type of loan that is secured on a vehicle, rather like a mortgage. Unlike a personal loan, the finance company purchases the vehicle and “hires” it to you until you make the final payment, at which time the car becomes yours – hence, Hire/ Purchase. Find out more about Hire Purchase.

What is PCP?

PCP stands for Personal Contract Purchase. This is a very effective way of reducing your monthly payments and offers three different options at the end of the agreement. Find out more about Personal Contract Purchase.

How much deposit should I put down?

A deposit of 10% is often ideal, but under certain circumstances, we may recommend putting down a larger deposit.

Why do people finance cars?

Have you ever wondered why so many people finance cars, even the wealthy? Some car buyers don’t have the cash readily available to buy the car that they want, others have the money available but would rather keep the cash in the bank to use it for other purposes.

Read: Benefits of car finance and which type is right for you

What is negative equity and what can I do about it?

Negative equity is the term used when the amount of outstanding finance on a car is greater than its value. Negative equity is an increasing problem as more car buyers opt for PCP agreements with small deposits and often exceed their contracted mileage. The risk of negative equity can be mitigated by taking the right advice.

Affordability – what does it actually mean?

One of the key factors any lender will look at is affordability. They will need to be sure that any borrower is truly able to service the debt and factors such as income and existing finance agreements are all taken into consideration. You should be sure that you really can afford any car that you finance.

What should I focus on – interest rate, monthly payment, or the final balloon payment?

A combination of the three is best. The interest rate will determine how much interest you pay over the term of the finance and also have an influence on your monthly payment, although a percentage point here or there won’t make a big difference to the monthly cost. The monthly payment should be comfortable but beware of trying to get the biggest balloon payment you can at the end of the agreement to lower the monthly cost. This could leave you with little or no equity at the end of the agreement, or even with negative equity.