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How Car Financing Works With Us
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Once the lender has done their final checks and you're happy to proceed, we’ll pay the dealer so all you need to do is pick up the car.
What is Car Finance?
While you may have heard of car finance, if you’ve never looked into it or applied before, you may be unfamiliar with how vehicle loans work. The main thing to remember is that car finance can be incredibly flexible - there are a number of different options available, and you should be able to find a solution that meets your needs.
Car finance is essentially a way to buy a vehicle without having to cover the cost outright. It’s not always easy to save up to purchase a car, especially if you want a newer, more reliable model. Vehicle finance is a similar process to getting a mortgage - you can spread your repayments through a secured loan. This means that the loan is secured against some form of collateral - in the case of a mortgage, this would be your home, and with car finance, it would be your vehicle.
Secured loans can be easier to access than other types of credit, but it is important to remember that if the loan is defaulted on, the lender has the option of repossessing your collateral. Secured loans can be a good option for people with bad credit, as lenders take on less risk with these sorts of loans.
There are two main options when it comes to vehicle financing. These are hire purchase and personal contract purchase - we’ve outlined both in more detail below:
Hire Purchase (HP)
With a hire purchase agreement, you’d generally make an initial deposit, and then fixed monthly payments. HP works in a similar way to any other type of loan, in that you’re spreading the cost of a purchase, along with any interest applied, over a longer period of time. And once the agreement comes to an end with HP, you’ll own the car outright.
Personal Contract Purchase (PCP)
PCP works a little differently to hire purchase. Although you’d also be making monthly instalments, these would not be going towards the cost of the vehicle, but the car’s depreciation. Throughout the agreement, you’ll be paying the difference between the initial sale price of the vehicle and its estimated worth at the end of the contract.
At the end of your term, you can then choose one of three options. You can buy the car by making a balloon payment (which will be the estimated value of the vehicle after depreciation), enter into a new PCP arrangement, or walk away entirely.
Bad Credit Car Finance
Many UK lenders understand that not everyone has a perfect credit score, and that getting a car on finance isn’t always easy for those with a poor credit history. That’s why specialist bad credit car finance lenders exist - they want to help people seeking a car loan get access to the money they need.
Here at Wheelie Good Finance, we work with a number of lenders who will consider your application, even if you have a low credit rating. Things like your affordability, which will mostly be determined by your income and expenditure, will also be looked at, not just your credit history.
For more information on bad credit car finance, you can check out our bad credit guides, which explore things like CCJ and IVA vehicle finance. Here, you’ll also find helpful tips on how to improve your credit rating.
Pros and Cons of Financing a Car
When it comes to vehicle finance, it can be difficult to know whether to lease a car or buy it outright. It’s therefore helpful to consider the pros and cons of financing a car. If you’re looking to get a vehicle on finance, with the intention to own it at the end of your agreement, you may wish to think about the advantages and disadvantages below:
Advantages of Financing a Car
Invest in a Vehicle
Leasing a vehicle can be likened to loaning a car from a finance company. You’ll never own the vehicle, and you’re paying towards the depreciation, not the car itself. With financing a car, on the other hand, you’re building equity, as you’ll own the vehicle at the end of the loan term. The money you invested is represented by the value of the car once the agreement ends.
Freedom to Customise and Sell
When you finance a vehicle, this means that once the payment schedule is over, you’ll own the car outright. You can therefore modify and customise the vehicle, often even before the agreement has ended. You’re also able to sell the car, either before or after the finance arrangement finishes.
No Mileage Limitations
There shouldn’t be any mileage restrictions with a financed car, as you’ll own it at the end of the agreement. As long as you don’t mind a high mileage, there’s nothing stopping you from driving tens of thousands of miles each year. Just bear in mind that this may make the vehicle depreciate in value faster.
Disadvantages of Financing a Car
Higher Monthly Instalments
In comparison to leasing a vehicle, the monthly payments when purchasing a car tend to be higher. The full vehicle price will need to be paid throughout the course of your agreement, not just the depreciation amount. When you finance a car, you may also require a larger deposit than when you decide to lease a vehicle.
Repair Costs
When you buy a car on finance, after the warranty period, if your vehicle requires any repairs, you’d have to cover these expenses. With a lease agreement, you’d only need to pay for such costs if the vehicle has any damage beyond regular wear and tear.
Depreciation Costs
While buying a car means you’re investing in equity, it does also mean facing depreciation. With any new vehicle, as soon as you purchase it, there is an initial steep depreciation of the car. The vehicle will then depreciate in value each year - some at a faster rate than others, depending on the make and model. This depreciation essentially eats into any equity you have in your vehicle.
Non Payment of Hire and Finance Agreements
Hire Agreements
If you get into any difficulties repaying the hire agreement, it's always best to get in contact with the dealership sooner as opposed to later. Continued missed payments without explanation could result in the car being taken away. If you speak to the dealership early on, you may be able to reduce the monthly payments for a period, or extend the term of the hire agreement and pay back lower amounts each month.
Finance Agreements
Whilst failure to repay all of the loan instalments won’t often result in the car being repossessed, it is an option the lender could take should you not speak to them in regards to having difficulties with repayment. If you are experiencing any difficulties with repaying your loan instalments at any time throughout the agreement, it's always best to speak directly to your lender, who may be able to offer payment breaks or renegotiate the terms of the original loan. This will often mean extending the loan so the monthly repayments work out lower. However, it often means a higher interest rate is applied, so you are likely to pay back more in the long term. Lenders have to be fair to the customer and cannot enforce anything without trying to help you first.
For help regarding any financial difficulties you may be experiencing, it’s easy to contact one of the free debt charities: Money Helper, The Citizens Advice Bureau or StepChange, online, via telephone, or in some cases in person. Should your lender or dealership fail to help you if you are experiencing financial difficulties, and you have asked them for help, then the Financial Ombudsman Service may be able to assist you.
Should I Finance a Car?
Overall, it will be up to you to consider the pros and cons of financing a car, and then come to a decision. Weigh up your options, and determine whether you wish to own the vehicle when you come to the end of your agreement.
There are several questions you can ask yourself, such as whether you’ll want a new car in a few years, how much you drive, and whether you’re looking for low monthly payments. And if you’re still unsure which option to choose, you can read our article on the advantages and disadvantages of car finance here.