About Car Finance

According to Finance and Leasing Association, in 2019, nine out 10 new cars in Britain were bought on finance.  These had a combined value of a whooping £3.3 billion!

With this in mind, if you want to finance a car, you should make sure to know your PCP from your HP.

You probably want to receive the best finance package to get the most value for your money? Then it is crucial to consider all available options before committing to a deal.

Here, we will discuss whether it’s possible to get a car with a bad credit score.  As well as everything you need to know about the truths of guaranteed car finance. You can also expect 2020 auto industry trends – from AI to online applications.

We’re here to guide you through the jargon and explain often heavy-going information in this handy guide.

Types of finance

To know which financial deal is most suitable, think about what you want to happen at the end of the agreement. Would you like to be an owner of the vehicle, exchange it for a new one or return the car to the dealer?

With your end goal defined, it becomes a lot easier to decide which deal to take out.

Personal Contract Purchase

Also known as PCP, this is one of the most popular forms of car finance.

Initially, a deposit is usually required (though nil deposit deals do exist). The higher the deposit – the lower the monthly payments.  The deal can be cost-effective if you have plenty to put down at this stage. Then, monthly payments are made until the end of the agreement.

You have three options with PCP when the agreement finishes:

1. Pay the Guaranteed Minimum Future Value (GMFV) to own a car

2. Return the car to the dealer

3. Exchange the car for a new one using any equity

PCP Advantages:

Get a new car every 3-4 years

You have a lot of options at the end of the deal

Less depreciation worries

PCP Disadvantages:

May need to pay car repair & excess mileage costs

GMFV can be expensive if you decide to buy a car

You will never own the car unless you make the final payment

PCP FAQ

Q: How long does Personal Contract Purchase lasts?

A: Typically between 24-48 months (2-4 years).

Q: Who pays for road tax when I take out a PCP deal?

A: That’s one of the disadvantages – you will need to pay for it since PCP does not cover Vehicle Excise Duty (road tax).

Q: Will taking out PCP affect my mortgage?

A: If you’re applying for a mortgage, the monthly outgoings are taken into account. Since PCP works on monthly payments, it may have an effect on how much you can lend for a property.

Hire Purchase

With a hire purchase agreement, you can finance a new or used car, though is used mostly for the latter. The main difference from PCP is that you own the car at the end of the agreement without any other additional options.

The process:

1. Pay the deposit or part-exchange a car to act as a deposit

2. Pay fixed monthly payments

3. When the payments are complete you own the car

HP Advantages:

No mileage limits

Fixed interest rate

You own the car at the end of the financial deal

HP Disadvantages:

Higher monthly payments when compared to PCP and leasing deals

You’re not the legal owner of the car until the last payment is made

Car depreciation costs need to be taken into account

HP FAQ

Q: How long does HP last for?

A: Usually between 36 to 60 months (3-5 years).

Q: How can HP be terminated/returned early?

A: If you’ve already paid off 50 per cent of your loan, then you can return the car to the dealer. However, you may be charged for car repair costs if it’s above Fair Wear and Tear.

Q: Can I sell a Hire Purchase car?

A: Yes, but only if you’ve paid off the finance. If you’re still in a process of paying for the car, legally it’s not possible to sell the car.

Personal Contract Hire

With this deal, you don’t have the option to own the car. As the name implies, you are only hiring the car, and at the end of the agreement, returning it. For those looking to hire a car, this financial option could be better suited than PCP & HP deals.

The agreement works similar to PCP, except that you don’t have options at the end – you have to hand the car back. For company car users, Business Contract Hire would be used instead, and is a similar product, apart from VAT being paid differently.

Advantages:

Lower monthly payments

You don’t pay for the full vehicle price, but the difference between the sale price and residual value

Deals can also include road tax, insurance & maintenance

Disadvantages:

Don’t have the option to own the car

Extra charges apply if you go over the agreed mileage limit or damage the car

Early termination may be costly

FAQ:

Q: How long does the PCH agreement last?

A: Typically between 2-4 years, but can be shorter in some instances.

Q: Does Personal Contract Hire cover insurance?

A: Unfortunately, PCH does not cover insurance. You’ll need to pay for it yourself.

Q: Can I get a car for PCH if I have bad credit?

A: Any financial agreement is made harder if you suffer from bad credit. However, specialist lenders/firms are set up to help people in such circumstances.

Personal Loans

This financial option is excellent for those that want to own the car right away. It is often arranged through high-street/online lenders & banks and remains a popular alternative to PCP, HP & PCH deals. What you need to keep in mind, is that the lower the borrowed sum, the higher the APR rate. You will also need to have a good credit rating to get a loan with a low interest rate to start with.

Advantages:

Can pay for a car right away

Flexible terms – can borrow from 1 to 7 years

No need to worry about extra mileage costs or the car’s condition

Disadvantages:

Need to have a great credit score or you’ll be unlikely to get a loan/lower interest rates

Interest rates can be higher when compared to other financial deals

Unlike with PCP/HP/PCH deals, you won’t be able to get any manufacturer deposit contributions to help bring down monthly payments

FAQ:

Q: What is APR?

A: APR stands for Annual Percentage Rate. You will need to pay this percentage on top of the total sum borrowed. That’s why it’s important to shop around to find the best deal, even if you don’t have the best credit rating.

Q: How long do I need to wait to get a loan?

A: It depends on the lender – it can take as little as 30 minutes in some places, or a matter of days with others.

Q: What is a guarantor loan?

A: If you have a bad credit rating, it is possible to get a loan through a guarantor. If the original borrower can’t repay the loan, the guarantor steps in and has to legally repay the loan.

0% finance

This type of financial deal means that you won’t need to pay interest on a car. It can be taken out on both HP and PCP deals, though you will need to have a good credit score to take advantage of this offering.

Advantages:

· You won’t need to pay any interest on the car

Disadvantages:

· Usually, a larger deposit is required – anywhere up to 50%

FAQ:

Q: How do I know if I qualify for 0% finance?

A: There are ways of seeing if you’re eligible for 0% finance before making a full application, but in general, a good indicator is having a strong credit score on your respective credit rating supplier (Experian etc.).

Q: Should I take out 0% finance or is it too good to be true?

A: It is a good deal for those that have strong enough credit scores & are willing to pay more each month. For this reason, it can be difficult to secure 0% finance if you have a bad score.

Q: Can I get 0% finance on used cars?

A: The majority of car dealerships only offer 0% finance on new cars. However, there are a few dealers that provide it for their used cars, too.

Car Finance for Bad Credit

This type of finance is aimed at those that have bad credit or no score at all. From the lender’s perspective, it is a risky business. Nonetheless, there are a few companies that specialise in car finance for bad credit, so it is possible to get accepted. If you’d like to know more information about bad credit, Stoneacre has a comprehensive guide.

Advantages:

· Able to take out a bad credit agreement, when regular car finance is unavailable

Disadvantages:

· Interest rates will be noticeably higher than usual

FAQ:

Q: How do I improve my credit score?

A: There are a several ways:

1. Make sure you’re registered on the electoral roll. It displays your name and address so it’s easier for finance companies to confirm your identity.

2. Keep up your loan repayments – if you have previous debts that aren’t paid, that’s a red flag for creditors.

3. Don’t financially associate with people who have bad credit scores via a joint account. If you are affiliated with someone who has a bad score, it is advisable to issue a notice of disassociation so that your credit score is not affected by theirs.

Q: What are the alternatives to bad credit car finance?

A: If you find that the interest rate is too high for bad credit car finance, there is another option. You can take out a guarantor loan instead, where someone else can vouch for the car loan.

Q: Can I get car finance if I’m bankrupt?

A: It is extremely unlikely that you will get any type of financial deal if you were declared bankrupt. The best thing to do here is to wait 12 months and then start rebuilding your credit score. Once the score is back to normal you can apply for car finance.

Guaranteed Car Finance – Does It Exist?

We’re sure you’ve heard this term before. It offers a guarantee for car finance regardless of your credit score or circumstances. Naturally, it doesn’t exist, as dealers & brokers don’t have control over finance – it’s the lenders that have the final say.

The Consumer Regulations 2010 states that advertisements must not contain the expression ‘loan guaranteed’ unless there are no conditions to the creditworthiness of the borrower. Any dealer or broker promoting ‘guaranteed’ car finance is likely to be in breach of this.

Any company promising such claims faces a Financial Conduct Authority (FCA) investigation and enforcement action.

Therefore, if you’re promised guaranteed car finance, you will want to walk away, and perhaps even report the company in question to the FCA for what is effectively false advertising.

Car Finance in 2020

Now that we’ve covered types of finance and other factors, let’s get right into the what’s happening for car finance in 2020.

FCA Crackdown

According to the BBC (source: https://www.bbc.co.uk/news/business-50052375), in 2020, the FCA is cracking down on car finance companies that create inflated interest rates to pay themselves higher commission.

FCA commented on the situation:

“By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.” – Christopher Woolard, Executive Director of Strategy and Competition at the FCA

Car Finance AI

Lender companies will benefit greatly from using AI, from assessing the risk to identifying perfect candidates. The AI is now developed enough to be extremely accurate, taking into account historical data to see how likely the borrower is likely to keep or break the commitment.

We hope this has helped to clear up some potential confusion around car finance, and also helped to give you more clarity on which finance package might work best for you.

You might also find my article titled four savvy ways to save money on your new family car a worthwhile read.