If you’re currently in a position where you need to replace an old car – or you simply want to upgrade to a newer model, then you’ll know full well just how costly this can be. Therefore, if you don’t have the required funds to pay for the purchase upfront, the good news for you is that you might be able to obtain a car finance loan to help cover the vast majority of the vehicle’s cost. With that being said, car finance loans often operate in a slightly different manner to that of conventional loans, so it’s best that you have a firm grasp of how they work before proceeding.
As such, we have created the ultimate guide to the Best Car Finance Loans of 2019. Within it, 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 what your rights are surrounding the legal ownership of the vehicle. To conclude our guide, we’ll present three of the best car finance loan companies currently operating in the market.
How to arrange car finance – Read our step-by-step guide
So now that you have a firm grasp of what car finance is – as well as the three main types of financing available, we are now going to discuss what you need to do to get started. As the hire purchase process is by far the most popular option taken by consumers in the UK, we have decided to give you a full step-by-step breakdown of the end-to-end process.
✔️Step 1: Choose your preferred car
First and foremost, you need to choose a car that meets your individual needs. Although you will have the freedom of paying the car off over many months, you still need to ensure that you are purchasing a car that you can actually afford. Don’t forget, the more expensive the car is, the higher your monthly payments are likely to be. Once you have found the car that you want to finance through credit, take note of its valuation.
✔️Step 2: Find a trusted dealership that offers hire purchase
Once you’ve found your desired vehicle, you then need to find a car dealership that [A] stocks your chosen car and [B] will allow you to obtain it on hire purchase. Moreover, you also need to check the cost of the car at the respective dealer.
For example, it is all good and well if the dealer stocks your car and allows you to obtain it on hire purchase, but the process would be counter-intuitive if you are paying significantly more for it in comparison to other dealers in the market. Finally, you should also check whether or not the car dealer is authorized by the Financial Conduct Authority for the purpose of offering car finance.
✔️Step 3: Assess what terms you are going to get
Once you have found a suitable dealer, you then need to find out what loan terms are on offer. In order 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 is currently like, and thus, whether or not they can actually approve the hire purchase for you.
If they can, they will then be able to offer you a number of different payment options, such as how many months you want to repay the funds, and at what rate of interest. Don’t rush into making a decision, as you should spend some time assessing your affordability levels.
✔️Step 4: Pay your deposit and drive away
Once you have agreed on the terms surrounding the hire purchase, you will then be required to make a deposit. Once again, the specific amount will vary depending on the dealer you use, 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 instalments, so do bear this in mind.
As soon as everything has been finalized, you will then be able to take your car home!
✔️Step 5: Make your repayments
As is the case with a conventional personal loan, you will now need 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. As car hire repayments are usually fixed, you’ll always pay the same amount each month, on the same date. Take note, if you miss a payment, or worse – you miss multiple payments, you stand the very real chance of having the car repossessed.
Before this happens, you’ll also encounter additional fees and charges for missing the payment, so always ensure that you have enough money in your bank to cover the payments. Don’t forget, you are driving the car on credit until it is paid, meaning that a missed payment is likely to be reported to the main three credit agencies. In doing so, it will impact your credit score negatively. Ultimately, until you clear the loan agreement in full, the dealer legally retains full ownership of the car.
✔️Step 6: Own the car 100% outright
When you make your final hire purchase repayment, you will then own the car 100% outright. This will be no different to purchasing a car with cash, meaning that the dealer will proceed to transfer the ownership into your name.
Best 3 car finance loan providers
So now that you know the ins and outs of what car finance is, you should now be able to make an informed decision as to whether or not it is right for your personal needs. Moreover, you should also be able to assess which of the three options – a personal loan, hire purchase, or personal contract purchase, you prefer.
As such, we are now going to list the best 3 car finance loan providers currently active in the UK market. We have listed one provider for each car finance type to make things easier for you. Before we do, be sure to read through the criteria that we implement before listing a provider.
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
What is a car finance loan?
In its most basic form, a car finance loan is a type of loan that allows you to purchase a car. However, the term ‘car financing’ is a somewhat broad one, not least because there is a number of different options that you will have at your disposal. As we will discuss in more detail shortly, this can include a conventional personal loan, hire lease, or a personal contract purchase. Each of these car finance options comes with its own pros and cons, and the one you go for might depend on 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
Many argue that the best option you have when it comes to borrowing funds to purchase a new car is a personal loan. The reasons for this are effectively three-fold. First and foremost, if you are currently in possession of a good or excellent credit score, then you might be able to obtain a personal loan at a highly favourable rate. In fact, some high street lenders are now offering deals of sub-4% APR, which is super competitive. Secondly, the vast majority of personal loans in the UK are unsecured.
This means that you will not be required to put any assets upfront as security, such as your house. However, the overarching benefit of obtaining a personal loan for the purpose of purchasing a new car is that you will own the car from day one. 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, as you likely won’t 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 of monthly instalments. However, there are some clear 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 likely 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, this typically averages 10% of the total cost of the car. Finally – and perhaps most crucially, opting for a hire purchase will mean that you will not own the car until you pay the loan back in full. Until then, the car dealer will retain full ownership, meaning that they have the right to reclaim the car if you default on the agreement.
✔️ Personal Contract Purchase
The third option that you might be able to go with in your pursuit of car finance is that of a personal contract purchase. Take note, although a personal contract purchase is somewhat similar to that of a hire purchase – insofar that you make monthly repayments for the duration of the contract, the fundamentals are bit more complex. As such, we have outlined some of the key characteristics of a personal contract purchase below
- 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 a personal loan or hire purchase. However, many argue that a personal contract purchase is actually more beneficial in some cases. For example, your monthly payments will typically be much lower than that of a hire purchase, and you are given the option of how you want to proceed 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.
How much does car finance cost?
Once again, there is no one size fits all answer to how much car finance will cost you, not least because there are heaps of variables to consider. For example, this will firstly include the type of car finance loan that you opt for. Moreover, the specific rate that you get will be dependent on your current financial standing, such as your credit score and your present relationship with debt.
Nevertheless, in order to give you a clearer picture at to some of the factors that might determine how much you end up paying when you obtain car finance, check out the key metrics we have listed below.
? Type of car finance
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.
? 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.
? APR percentage
Regardless of which loan type you opt for, you will need to pay a rate of interest on the agreement. 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.
? 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 can vary from just 0.5%, up to 5%.
Moreover, if you opt for a personal contract purchase, then you need to assess how much you will need to pay if you decide to keep the car at the end of the agreement. Ultimately, just be sure to thoroughly check the loan agreement prior to putting pen to paper.
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.