What Does It Mean to Buy a Car on Finance?

Car finance is now one of the most popular ways for people to buy a car. Why? Because you can pay off the overall car in manageable monthly payments to suit your financial requirements, rather than paying outright. It’s a much more feasible option for a lot of people, however the different types of car finance out there and what each means in relation to your individual circumstances can be confusing. Keep reading to find out what buying a car on finance means for you.

What is car finance?

A car finance agreement is a credit agreement between you and the finance lender. This agreement allows you to pay the balance of the car over a set period of time, with interest on top.

How does buying a car on finance work?

There are typically four main options of car finance available, and each of them are there to cater to a range of financial circumstances. 

Personal Loan/Car Loan

This form of finance involves borrowing money from a bank or building society. 

1. You decide on the amount you’d like to borrow and how long you’d like the repayment term to be 

2. If your loan is accepted by the bank, they’ll pay the money directly into your bank account

3. You'll then pay the loan instalments off back to the provider (with added interest from borrowing the money)

4. You’ll own the car from the moment you buy it 

Personal Contract Purchase

This is a good car finance option if you’d like to change cars frequently and have more flexibility at the end of the payment term. Monthly payments are usually smaller too.

1) You start by paying an average deposit of 10%, and then have fixed monthly payments. These payments only cover the depreciation of the car, which is the car's current fair market value subtracted from its purchase price, minus any sales tax or fees.

2) You’ll have an agreed mileage limit and a wear and tear contract and if either of these aren’t adhered to, you could end up paying extra.

3) At the end of your payment term, you’ll have three options:

-Pay the final lump sum (often referred to as balloon payment) and own the car
-Exchange the car for a newer make and model and start a new PCP deal
-Return the car completely 

Bear in mind too that the car is fully owned by the lender until you pay off the final balloon payment, if you choose to do so. 

Hire Purchase

Hire purchase is similar to PCP however you don’t have the flexibility.

1) A deposit is required on the car (usually 10%), pay fixed monthly repayments including interest. 

2) You are essentially only hiring the car, so it is owned by the lender, until you make your final payment, whereby you’ll own the car. 

Car Leasing / Personal Contract Hire

You can see leasing as similar to renting. With this form of finance, you’ll never have the chance to buy the car fully and own it. However, you can change the car every two to three years.

1) You’ll set up an agreed payment term and pay monthly repayments

2) The overall leasing cost is determined by the type of vehicle, contract period, and mileage limits agreed upon. Typically, you must pay up to three months' rent in advance.

It’s important to remember that when you buy a car on finance, the finance provider rightfully owns the car during the contract. This means that you can’t legally sell the car, and if you fall behind on repayments the car could be repossessed. However, that being said, car finance can be a great option if you have less than perfect credit, you get more flexibility, and you can change your car more often.

If you’re interested in the world of car finance and want to find out more, read our other blog articles such as things to consider when taking out car finance and what documents you need to get car finance.