New car finance guide and how to get the best deal
More new cars than ever are bought on finance, so we’ve put together this comprehensive guide
Many new car buyers think they can’t afford a new car, but the reality is they can often be cheaper to get your hands on than an older, less reliable used car.
Around 80% of new car purchases are made through some kind of finance deal and, thanks to this growing popularity; there are some great deals to be had on some brilliant new cars.
It's important to understand the different types of finance and what they mean for you, with the most common types being Personal Contract Purchase (PCP), Hire Purchase (HP) and Contract Hire.
There are also plenty of leasing companies offering great deals, plus you can also take a personal loan out to fund the car. These will be touched upon further down the page.
Personal Contract Purchase (PCP)
PCP is one of the most common ways to buy a new car today. The finance is arranged through the dealer, so it's an easy and quick process to go through.
You pay a deposit – as little or as much as you want – followed by monthly payments over an agreed term, with three options available to you when you get to the end of the term.
You can either hand the car back and walk away, pay a final payment (sometimes referred to as a balloon payment or Guaranteed Minimum Future Value), or use the car as a deposit against another car from the same dealer.
The advantages of using PCP are that it is fairly flexible. The more deposit you put down, and the longer the contract term, the lower the monthly payments are. Similarly, because of the larger balloon payment at the end (GMFV), this means monthly payments tend to be lower than those on Hire Purchase.
The main disadvantage of PCP, as with other forms of finance, is that you don’t own the car throughout the term. The finance company does. Also, if you can’t afford the final payment, or indeed the monthly payments, then the car may be repossessed by the finance company.
Finally, dealers will set annual mileage limits, which, if exceeded over the whole term, will cost you extra per mile you go over. This is because your estimated annual mileage is used to calculate the monthly payments at the beginning of the contract.
Thanks to popularity of this method of financing a new car, though, manufacturers and dealers often have attractive offers running which will appeal to potential buyers.
Hire Purchase (HP)
Hire Purchase agreements differ from PCP in that it is a loan against the car. In turn, the vehicle is used as collateral and will be taken away from you if you fail to make the monthly payments.
As with PCP, HP is taken out through a dealer and makes a finance attainable even to those with poor credit ratings thanks to the car acting as collateral.
There's also no lump sum to pay at the end, but you don’t own the car until the final payments is paid at the end of the agreement. Normally, a deposit is required at the beginning, but this is usually no more than 10%, plus it's likely there will be deals and negotiations to be made.
Repayment terms are flexible and interest rates are fixed, but short-term deals can be relatively expensive.
The clue is in the name. Contract hire is essentially a long-term rental, meaning you’ll never own the car if you choose to ‘buy’ a car through this method.
It's quite a simple way of getting yourself into a new car – especially one you wouldn’t normally be able to afford if paying with cash – plus contract hire monthly payments tend to be cheaper because you’re not paying any money that will result in you owning the car.
This is obviously good if you want to keep costs down, but the appeal is limited to those who want the option of owning the car at the end of the agreement.
Similar to PCP, contract hire agreements require you to service and maintain the vehicle yourself, and in line with manufacturer-recommended guidelines, but there are often deals in place to be included as part of the package to boost the appeal to buyers.
Cash or credit cards
The most straightforward way to pay is in cash – or at least with a cheque or debit card. But when even the cheapest new cars cost several thousand pounds, few of us are willing – or able – to pay in one go.
Credit cards are another option, but unless you’re able to transfer the balance from one card to another, or are in a position to pay off the balance quickly, the interest will be prohibitively high. We wouldn’t recommend it.
Also bear in mind that dealers get commission from lenders in return for signing you up for car finance deals. They can then use some of this commission to fund discounts for you, so if you pay cash or use a credit card, there could be less room to haggle.
A personal loan is when you borrow money from a high-street bank, online lender or the Post Office and repay it each month over an agreed period of time at a set interest rate.
There are two types: secured and unsecured. A secured loan requires some form of collateral (usually your house) that the lender will take and sell to recover its cash if you fail to pay them back. An unsecured loan doesn’t require collateral – instead, the lender decides whether it can trust you to repay the money based on your credit rating.
When taking out a personal loan – or any of the other forms of borrowing mentioned in this article – be sure to check the Annual Percentage Rate (APR), which tells you how much the loan will cost you per year. The figure includes the interest rate plus any fees. The lower the percentage, the less you’ll have to pay back.
There are two main advantages to a personal loan. The first is that you don’t have to put down a deposit, which you almost certainly will do with the other forms of finance. The second is that you will own the car outright and won’t face any restrictions as to how you drive it – which isn’t the case with dealer finance or lease deals.
The disadvantage of a personal loan is that the monthly payments and APR are likely to be higher than for dealer finance.
Logbook loans are a fairly recent development. This is a loan secured on your car, but their nature means you can’t use them to fund a car to directly replace the one you’re borrowing against.
They’re fairly quick to arrange, either online or on the high street, and usually allow you to borrow between £500 and £50,000 depending on the value of your car. In most cases, you can borrow up to 50% of its value.
The agreement involves handing over your vehicle's V5C document (also called the logbook). This means the lender will temporarily own your vehicle until the loan is settled.
APR for logbook loans can be extremely high – around 400% in some cases – and most logbook loans run for 78 weeks (18 months). Interest is charged on the loan amount each week, meaning a £1,500 loan could cost £2,750 in interest alone.
Because the loan is secured on your vehicle, failure to repay means the lender could seize your car.
Car finance terms explained
APR (Annual Percentage Rate) APR gives you a realistic idea of the total cost of your borrowing. A basic flat rate of interest can be misleading, as it doesn’t include any extra costs or fees.
Deposit contribution Some manufacturers will make a contribution towards the deposit on a new car as an incentive to purchase. The value of this contribution can vary from a few hundred to several thousand pounds. These contributions are usually available for fixed periods of time, and you may have to sign up to certain finance packages to take advantage of then.
Excess mileage When leasing or buying a car on a PCP, you may be restricted to covering a certain mileage, which helps predict the future value of the car. This can usually be negotiated when you sign up, but it's worth erring on the side of caution, because you could be charged several pence per mile if you go over the limit.
Gap insurance This is a finance product that covers the shortfall between what your insurance company will pay if your car is written off or stolen and what you originally paid for the car. You can pay monthly or up-front, and it's available for new and used cars bought on finance.
Guaranteed Minimum Future Value (GMFV) When buy a car on PCP, the dealer will give you a guaranteed minimum future valuation so you know how much it’ll be worth at the end of the agreement. This means you’re protected from any sudden and unexpected drops in value. It also means you know how much you’ll need to pay to settle the PCP agreement, or how much your car will be worth if you hand it back in settlement. The GMFV is usually a conservative estimate of how much the car will be worth at the end of the agreement, so if it ends up being worth slightly more, you can use the equity as part of the deposit on your next car.
Zero percent or 0% APR The holy grail of interest rates. This means that what you borrow is the same as the amount you pay back. Borrow £10,000 at 10% APR and you’ll pay back £11,616 over three years, but at 0% APR, you’ll only pay back the £10,000 you borrowed.