Looking for a new car, but you don’t have enough savings? Car financing is a viable option to look into. You can finance your car in various ways like, for example, on instalment at the dealer, borrowing money from the bank, or leasing it. Whatever you go for, your chosen method of car financing must suit your financial situation. In this article, you will learn how financing a car works, which ways of car financing there are, and useful tips with which you can find the most suitable car financing!

What Is Car Financing?

Financing a car means that you take out a loan from the bank or dealer so that you can afford that new car. You repay an amount, including interest, to the financing company every month. When financing a car, it does not matter whether you want to buy a new or a used car.

There are different loans with different conditions. With some car loans, the vehicle is not yours immediately, but only after full repayment of the loan. In these cases, you can only sell the car if you have permission from the finance company.

Who Usually Offers Car Financing? 

Financing your car with a personal loan at the bank is a frequently used option. You borrow a certain amount to finance a car. You will receive the amount to finance your car in one go in your checking account. You choose in advance in how many months you will pay it off (the term). Because the car is really yours, you build up claim-free years and benefit from a no-claim discount on your car insurance. If you have extra money left, pay off your loan extra and save on interest costs.

A car loan with a final term through the dealer is another option. Instalment buying and deals like ‘buy now and pay in five years’ seem nice, but they always turn out expensive. Either you pay a high interest rate, or the term is a lot longer. Whatever the catch looks like, the fact remains that it will be more expensive in the end. Moreover, the car is only really yours when the car loan has been paid off completely. Otherwise, the dealer will confiscate your car. An expert car finance broker in the UK, like Carplus, foresees such potential issues and provides cost-effective loans for customers looking to buy a car. Even if you have a bad credit rating, such organizations get clients accepted for car finance.

A private lease is another popular way of car financing. You pay a fixed amount per month. In return, you drive a brand-new car and don’t have to worry about car insurance, road tax, or maintenance costs. But leasing also has a number of drawbacks. First of all, the car is not really yours. After the lease period, you return it. And if you want to get rid of the contract in the meantime, it will cost you a lot of money. 

Things to Remember When Applying for Car Financing

Financing a car at 0% interest? Don’t get yourself into financial trouble because something seems cheaper than it is. For example, with financing a car without interest, the “advance” can amount to 30% of the new price, or there are hidden costs. Below are important things to remember when applying for a car loan.

  • Down Payment: With a down payment, it depends on what sum you choose to pay to take out the loan. This will determine how much you will pay in the end. If you have a good credit score, you sometimes won’t need to make a down payment. But if you want to keep the monthly instalments smaller, a down payment is usually the better solution.
  • Annual Percentage Rate (APR): The total cost of credit or a loan is expressed in the form of a percentage and can be compared to an annual interest: the APR. This not only takes into account the interest that you have to pay but also other costs related to the credit, such as file costs. 
  • Taxes: State taxes on cars have to be paid at the time of acquisition. Depending on where you buy the car and how much it costs, this could make your wallet several thousand pounds cheaper.
  • Fees: Apart from the fees to register your car with your regional motor vehicle department, it’s possible you’ll have to pay destination and/or documentation fees — or other fees set by the dealership of choice.
  • Terms: This is how much time you have to pay back your loan. There are many loan terms available; most are from 12 to 36 months, but even 72- and 84-month car loans exist! The longer the loan term, the higher the monthly payment, which results in seriously overpaying for your car. 
  • Monthly payments: When paying for your car loan, you will make monthly payments. These will include both principal and interest. Make sure to keep these monthly payments manageable because if you don’t, it will hurt your credit rating and, if you miss too many payments, your car may be reclaimed. 

Ways to Loan a Car

Next are some popular ways to loan a car. Always do your own research and choose the most suitable option:

Hire Purchase (HP)

After a down payment, you pay the remainder of the purchase price in instalments. You are not the owner until you have paid off the last instalment. Hire purchases have drawbacks: if you cannot afford the monthly payment, and you have not yet paid off 75% of the total amount due, you lose the car. If the proceeds from the car are not enough to pay off your debt, you will still have to pay the rest. 

Personal Contract Purchase (PCP)

This usually means paying a large(er) deposit and then low monthly payments over a fixed period. At the end of the PCP, you can either pay a lump sum to purchase the car, return it or sell it privately to pay off the remainder. PCP is a good option for those who like to often change their vehicle and is based around a minimum guaranteed future value for a car. It’s imperative to stick to the agreed mileage limits and to keep the car in good condition to avoid penalties. 

Car Leasing

Don’t have the money to buy? Then you can opt for a private lease. You pay a fixed amount to the leasing company every month. In return, you will receive a car. Many costs are often included in this. Think of maintenance, road tax, and insurance. The leasing company remains the ultimate owner. Although car servicing may be included, a large upfront deposit is usually required. Again, mileage limits may apply.

Summing Up

Financing a car means that you take out a loan from the bank or dealer so that you can afford that new car. You repay an amount, including interest, to the financing company every month. You can finance your car with a loan from the bank, with a car loan through the dealer, or by leasing. Important things to remember when applying for a car loan are down payments, APR, taxes, fees, terms, and monthly payments. Popular ways to loan a car are through a hire purchase, personal contract purchase, or leasing. Always remember to do your own research before starting with car financing. 


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