How do you go about buying a new car or upgrading that old model to a newer and more efficient model? Well, if you have enough cash hand, you only need to walk into a dealership and make a cash purchase. If you, however need the upgrade but don’t have enough savings, you can always on the numerous financial institutions ready to offer you a car finance loan. The car finance loan is no different from any other loan offered by a bank or a credit facility save for the fact that it can only be used to fund the acquisition of a car. So how do you qualify for the car finance loan, how much money does the lender advance and what are some of the best car finance loan companies.
In answering these questions we have prepared the ultimate guide to the Best Car Finance Loans of 2021. Here, we’ll give you a full breakdown of what a car finance loan is, how it works, how much it’s likely to cost you, and insights about the legal ownership of the vehicle. Plus we also provide you with a list of what we consider the best three car finance loan companies.
Table of Contents
- Extended loan repayment periods of up to 60 months
- Specialist car hire purchase company
- Platform authorised by the FCA
- Specialist hire purchase company
Pros and cons of car finance loans
- Allows you to afford a new car if you don’t have the required funds
- Flexibility to purchase a more expensive car as you will be paying the funds back in installments
- Suitable for all credit profiles
- Most lenders provide fairly extended repayment periods – up to 7 years
- Most lenders maintain an easy and straightforward online loan application process
- You won’t own the car outright until you repay your car finance loan in full
- Inability to repay loan exposes your car to possible repossession
Best 3 car finance loan providers: Reviewer’s choice
How to arrange car finance – step-by-step guide
Step 1: Choose your preferred car
First and foremost, you need to choose a car that falls within your budget in terms of initial cost and maintenance. Although you will have the freedom of paying the car off over several years, you still need to ensure that you only purchase a car that you can actually afford. Keep in mind that an expensive the car almost always translates to higher monthly repayment premiums and maintenance costs.
Step 2: Find a trusted car finance loan provider
After identifying the car you wish to buy, you now have to find a car finance loan provider willing to fund its acquisition. This can be a bank, another asset financing institution or even the car dealership.
In most cases, how much you get as car finance loan and the interest rate it carries will largely depend on such factors as your creditworthiness, deposit amounts, and your ability to repay the loan within the agreed period – proven by your annual incomes.
Step 3: Agree on the loan terms
Once you have found a suitable dealer, you now need to find out what loan terms are on offer. To achieve this, the dealer will likely need to run a credit check on you. This will allow them to ascertain what your financial standing and whether you qualify for a car finance loan.
If you do, the lender will likely present you with the loan pre-approval letter detailing such loans terms as how much they are willing to offer you, the loan interest rates, repayment periods and the amounts to be repaid in monthly installment
Step 4: Pay your deposit and drive away
Once you have agreed on the terms surrounding the car finance loan, you will then be required to make a deposit. The specific amount will vary depending on your preferred dealer although a ball-park figure will usually be around 10%. As we noted earlier, paying a larger deposit will allow you to benefit from smaller monthly installments, so do bear this in mind.
Step 5: Make your repayments
As is the case with a conventional personal loan, you will now be required to start making your monthly repayments. It is highly likely that the dealer would have got you to set up a direct debit agreement, meaning that the payments will be taken from your bank account every month. And if you are dealing with fixed loan interest, it will be highly likely that these loan repayments will be fixed. You, therefore, will always end up paying the same amount each month and this erases your budgeting process. Note that missing multiple payments and failure to pay altogether may the lender repossess the car.
Missing payments also increases the cost of the loan substantially through fines and penalties. And this calls for proper budgeting to ensure you always have enough money in your bank to cover the payments. Far from fines and penalties, note that missed payments are likely to be reported to the main three credit agencies effectively lowering credit score and dimming chances of getting affordable loan in future.
Step 6: Own the car 100% outright
Some lenders insist on holding on to the car ownership deeds until the loan is repaid in full after which you are credited with absolute ownership of the car.
Best 3 car finance loan providers
Now that you understand the merits and demerits of applying for a car finance loan and the factors that most loan providers consider in determining the loan amounts to advance you and their accompanying interest rates, lets look at the best three car finance loan providers in the UK.
But first, we look at the criteria used to rank these providers and why we consider them the best.
Criteria used to rank the best car finance providers
- Lenders with the most competitive interest rates
- How much the lender is able to offer
- What credit score you need to obtain the car finance
- What type of car finance is offered
- How much you will need to pay each month
1. Admiral – Best provider for the personal loan option
Aside from lenders that offers asset financing loan specifically designed to facilitate the purchase of a motor vehicle, others offer multi-purpose personal loans.
The upside of such a personal loan over asset financing loan is that you stand to benefit from potentially low rates, especially if you have a good credit score. And one such personal loans provider is UK's Admiral bank. Here, interest rate on personal loans starts from 3.9% APR for amounts of up to £25,000.
Note however that the low interest rate and attractively high loan amounts are only available to individuals with excellent credit score. You will also have between 1 and 5 years to repay the advanced amounts and accrued interests. How much you qualify with Admiral and accompanying interest rates are however pegged on such factors as your credit score. Moreover, you'll need to have a minimum annual income of £10,000.
- Extends maximum loan term of 5 years
- Perfect for borrowers with an excellent credit profile
- Extended loan repayments periods of up to £25,000
- Not available to bad credit borrowers
2. Hippo Leasing – Best provider for the hire purchase option
If you like the sound of the hire purchase option - meaning that you will own the car outright once you have made all of your monthly payments, then it might be worth looking to see what Hippo Leasing has to offer. In a nutshell, the platform is a specialist car dealer that allows you to obtain your vehicle on hire purchase.
Most importantly, the platform is authorized by the Financial Conduct Authority, meaning that it has to engage in ethical lending. Hippo Leasing will give you the option of putting a deposit down that is equal to 3, 6, or 9 monthly payments. The loan APR will then be based on such factors as the amount of loan down payment posted, your minimum annual incomes, and your overall credit profile. You will then get the option of paying the money back within 24 - 60 months.
- Stocks a wide selection of cars
- Loan terms start from 24 months - up to a maximum of 60 months
- Licensed and regulated by the Financial Conduct Authority
- Requires that you pay 3, 6, or 9 months worth of monthly interestas downpayment
3. CarLeasing – Best provider for the personal contract purchase option
If neither the personal loan or car finance loan option meets your individual needs, then you can always turn to a personal contract purchaseor the lease purchase options. And Hippo Leasing has the best of both options. The UK-based company offers a plethora of cars under a personal contract purchase agreement, and it is fully regulated and authorized by the Financial Conduct Authority.
The process if highly flexible and involves entering into an agreement with the company in which you promise to lease one of their cars and purchase it later. At the end of the agreement, you will get the chance to purchase the car at its current market value. Take note, the finance company behind the Car Leasing agreement will retain full ownership over the vehicle until you make good the lease amounts and the final cost cost of the vehicle.
- Agreements typically range between 2 - 5 years
- Offers personal contract purchase agreements
- Stocks a wide range of cars
What is a car finance loan?
In its most basic form, a car finance loan is a type of loan that goes towards the purchase of a motor vehicle. However, the term ‘car financing’ is a somewhat broad, especially because it can be used to refer to a number of car loan options currently available. As we will discuss in more detail shortly, these include the conventional personal loan, hire lease, or a personal contract purchase. Each of these car finance options comes with its own pros and cons, and whether you qualify for one largely depends on such factors as your current credit score, or the amount of funds you have at your disposal to put down as a deposit.
In order to give you a clear picture of how car finance can works, we have outlined the three main options you will likely have to choose from.
- Personal Loan
Personal loans have time and again ben hailed as one of the best options available to you when it comes to borrowing funds to purchase a new car. The reasons for this are effectively three-fold. First, if you are currently in possession of a good or excellent credit score, then you might be able to obtain a loan at an affordable interest rate. In fact, some high street lenders are now offering deals of 4% APR, which is super competitive. Secondly, most personal loan providers don’t necessaily require collateral.
This means that you will not be required to put any assets like your house up to secure the loan. Moreover, you get absolute rights and ownership of the vehicle as if you purchased in cash. In fact, as soon as the car dealer receives the funds, you will retain 100% ownership of the vehicle. As we will discuss shortly, this is in stark contrast to other car finance options that don’t let you own the car until all of your repayments have been made.
- Hire Purchase
The second option that you have at your disposal is to opt for a hire purchase agreement. In its most basic form, this operates in a similar fashion to a conventional lease. The way it works is you will sign a car hire purchase with the dealer in question, and then repay the cost of the car over a set number of monthly instalments. However, there are some differences between a car hire purchase and that of a personal loan. For example, it is likely that you will pay a higher rate of interest with the car dealer, not lease because you are not going direct with a lender.
Moreover – and unlike a traditional personal loan – you will need to put down a deposit in order to be eligible for the hire purchase. While the specific amount will vary from provider-to-provider, it typically averages 10% of the total cost of the car. Finally – and perhaps most crucially – the hire purchase service lender may not transfer the ownership of the car until you pay the advance is paid in full. This also implies that the lender can easily reclaim the car if you default on the monthly repayments.
- Personal Contract Purchase
The third car finance loan option if the personal contract purchase agreement offered by most car leasing companies. Take note though that while the personal contract purchase may look similar to a hire purchase agreement, the contract purchase adopts a different apprach to acquiring the car. Here is an outline of some of the key characteristics of a personal contract purchase:
- Much like a purchase hire, you will be required to pay a deposit upfront, which again, will usually need to be at least 10%
- You will be offered a rate of interest, which will be based on your current credit score (among other metrics)
- You do not own the car while the agreement is still ongoing
- However, when the contract does come to an end, you will be given three options as to how you want to proceed. You can either [A] return the car at no extra cost  purchase the car outright at its current market value or  use the car’s current market value as a deposit for a new personal contract purchase.
As you can see from the above points, a personal contract purchase is much more complex than personal loan or hire purchase finacing options. This however isnt to say that the personal contract purchase doest have its benefits. For example, your monthly payments will typically be much lower than that of a hire purchase, and you are given the option of buying the car or returning it at the end of the agreement. Moreover, not only will you not need to worry about the impact of depreciation (which is guaranteed), but you can usually include servicing and maintenance within the agreement.
What is the cost of a car financing loan?
Again, there is no one size fits all answer to how much car finance will cost you, especally considering that there are heaps of variables to take into consideration. For example, this will firstly include the type of car finance loan that you opt for. Moreover, the specific rate that you get will also be dependent on your current financial standing, such as your credit score and your current debt to income ratio.
Nevertheless, in order to give you a clearer picture of some of the factors that might determine how much you end up paying for the car finance loan, check out the factors listed below:
i) Type of car finance loan option
If you opt for a personal contract purchase over a hire purchase agreement, then you will all-but certainly pay a lower monthly amount. This is because you are only paying an amount equal to the vehicle’s assumed depreciation, as opposed to paying the full value of the car off.
ii) Size of your downpayment
While the car dealer in question will likely specify a minimum deposit amount that you need to put down (which is usually around 10% of the car’s value), you do have the option of contributing a larger downpayment. This can be highly beneficial for you in the long-run, as it will mean that your monthly payments will be lower. On the contrary, if you opt for a personal loan then you likely won’t need to worry about a downpayment.
iii) APR percentage
Your choice of loan type notwithstanding, you will need to pay interests on the advanced amounts. The specific APR rate will not only vary depending on the type of loan you opt for and the dealer behind the loan, but also your specific credit profile, too. In other words, the better your credit rating, the lower the interest rate is likely to be.
iv) Additional fees
You need to be sure that you understand the car finance package that is offered to you, as this might include a number of additional fees that need to be taken into account. For example, if opting for a personal loan, then you might need to pay an origination fee. This is the fee charged by lenders to cover the cost of facilitating the loan, and usually ranges from 0.5%, to 5%.
- Extended loan repayment periods of up to 60 months
- Specialist car hire purchase company
- Platform authorised by the FCA
- Specialist hire purchase company
Glossary of loan terms
A credit score shows your creditworthiness. It's primarily based on how much money you owe to loan or credit card companies, if you have ever missed payments or if you have ever defaulted on a loan.
Guaranteed Approval is when, no matter how bad, your credit score its, your loan application will not get declined.
A Credit Limit is the highest amont of credit a lender will lend to the borrower.
Collateral is when you put up an item against your loan such as your house or car. These can be repossessed if you miss payments.
A Cash Advance is a short-term loan that has steep interest rates and fees.
Your Credit Rating is how likely you are to fulfill your loan payments and how risky you are as a borrower.
Fixed Interest Rate is when the interest rate of your loan will not change over the period you are paying off you loan.
The Interest is a percentage based on the amount of your loan that you pay back to the lender for using their money
If you default on your loan it means you are unable to keep up with your payments and no longer pay back your loan.
If you miss a payment the lender will charge you for being late, this is known as a late fee.
An Unsecured Personal Loan is when you have a loan based solely on your creditworthliness without using collateral.
A Secured Loan is when you put collateral such as your house or car up against the amount you're borrowing.
This is the Interest Rate used by banks for borrowers with good credit scores.
The Principal amount the borrower owes the lender, not including any interest or fees.
A Variable Rate is when the interest rate of you loan will change with inflation. Sometimes this will lower your interest rate, but other times it will increase.
An Installment Loan is a loan that is paid back bi-weekly or monthly over the period in which the loan is borrowed for.
A Bridge Loan is a short term loand that can last from 2 weeks up to 3 years dependant on lender.
Having an AAA Credit Rating is the highest rating you can have.
A Guarantor co-signs on a loan stating the borrower is able to make the payments, but if they miss any or default the Guarantor will have to pay.
LIBOR is the London Inter-Bank Offered Rate which is the benchmarker for the interest rates in London. It is an average of the estimates interest rates given by different banks based on what they feel would be the best interest rate for future loans.
Home Equity Loans is where you borrow the equity from your property and pay it back with interest and fees over an agreed time period with the lender.
Debt Consolidation is when you take out one loans to pay off all others. This leads to one monthly payment, usually with a lower interest rate.
If you obtain a Student Loan to pay your way through College then you loan is held with the Department for Education U.K.
Financial Aid in the form of grants is funding available to post-secondary education students throughout the United Kingdom and you are not required to pay grant
What is the best car finance option if I have excellent credit?
If you have a really good credit score, then you might be best off going with a personal loan. Not only will you likely benefit from super-low APR rates, but you'll also own the vehicle outright from day one.
If I go with a hire purchase, how much will I need to pay upfront?
This will depend on the specific provider that you go with. We find that the industry average is a minimum of 10% upfront.
Will I own the car if I opt for car finance?
If you opt for a personal loan, then you will own the car 100% from the moment you purchase it. On the contrary, if you opt for a hire purchase or personal contract purchase, then you will not own the car until you meet all of your repayments in full. Don't forget, you are under no obligation to proceed with ownership if you go with a personal contract purchase.