How does financing a car work?

How does financing a car work?

Buying a new car can be a stressful and expensive process. Car finance is a way of paying for a car over time rather than paying for it all in one go. There are many different types of car finance available, so it’s important to know about them and how they work. That way, you can decide which option is best for you before you get a quote.

In this guide

Buying a new car can be a stressful and expensive process. Car finance is a way of paying for a car over time rather than paying for it all in one go. There are many different types of car finance available, so it’s important to know about them and how they work. That way, you can decide which option is best for you before you get a quote.

In this guide

What is a car financing agreement?

Car finance allows you to spread the cost of buying a car over an agreed payback period. Whether you’re buying a new or used car, it’s a great way to get yourself on the road without needing to put down a large sum of money upfront.

It is usually spread over a 24-60 month period, and you would then make monthly repayments until the finance amount is fully repaid.

Car finance eligibility

Everyone’s eligibility for car finance is different because everyone has different personal factors. Some of these factors include:

  • Credit score
  • Credit utilisation and history
  • Affordability.

You might be worried you won’t be eligible for car finance because you’ve been rejected by other lenders in the past. Having poor credit can make it harder to get car finance, because you might be seen as a higher risk to lenders. If you’ve been refused elsewhere, we may be able to help you with bad credit car finance.

We use a soft credit check at the point of application. This doesn’t affect your credit score. However, some lenders may use a hard check when you apply which does leave an impact on your score.

We only use a hard check when you’ve decided you’d like an agreement with us, and contracts are drawn up for you to sign.

You might have also heard of lenders offering no credit check car finance – this doesn’t exist. A responsible lender will need to check eligibility and make sure any finance they offer is affordable for you.

We offer vehicle finance across the whole of the UK, including Northern Ireland, so we could help you get car finance near you at a rate you can afford.

How much does car finance cost?

Your monthly repayment amount will depend on several factors, including the amount you borrow, the length of your agreement, and the type of agreement you have. In most cases, the longer the amount of time, the lower the monthly repayments.

The interest rate, or APR, that you are offered also depends on personal circumstances. If you have bad credit, you might be asked to pay a higher interest rate. This could be because you’ve missed payments before or have a CCJ or IVA. In that case, a lender might see this as higher risk, that’s why they might offer you a loan with a higher interest rate.

Try our calculator below to see what your agreement could look like.

What is a car financing agreement?

Car finance allows you to spread the cost of buying a car over an agreed payback period. Whether you’re buying a new or used car, it’s a great way to get yourself on the road without needing to put down a large sum of money upfront.

It is usually spread over a 24-60 month period, and you would then make monthly repayments until the finance amount is fully repaid.

Car finance eligibility

Everyone’s eligibility for car finance is different because everyone has different personal factors. Some of these factors include:

  • Credit score
  • Credit utilisation and history
  • Affordability.

You might be worried you won’t be eligible for car finance because you’ve been rejected by other lenders in the past. Having poor credit can make it harder to get car finance, because you might be seen as a higher risk to lenders. If you’ve been refused elsewhere, we may be able to help you with bad credit car finance.

We use a soft credit check at the point of application. This doesn’t affect your credit score. However, some lenders may use a hard check when you apply which does leave an impact on your score.

We only use a hard check when you’ve decided you’d like an agreement with us, and contracts are drawn up for you to sign.

You might have also heard of lenders offering no credit check car finance – this doesn’t exist. A responsible lender will need to check eligibility and make sure any finance they offer is affordable for you.

We offer vehicle finance across the whole of the UK, including Northern Ireland, so we could help you get car finance near you at a rate you can afford.

How much does car finance cost?

Your monthly repayment amount will depend on several factors, including the amount you borrow, the length of your agreement, and the type of agreement you have. In most cases, the longer the amount of time, the lower the monthly repayments.

The interest rate, or APR, that you are offered also depends on personal circumstances. If you have bad credit, you might be asked to pay a higher interest rate. This could be because you’ve missed payments before or have a CCJ or IVA. In that case, a lender might see this as higher risk, that’s why they might offer you a loan with a higher interest rate.

Try our calculator below to see what your agreement could look like.

What your car loan could look like

Summary

  • Monthly payment: £000.00
  • Total to repay: £00,000.00
  • Calculated APR: 00.0%

Representative 30.5% APR

What your car loan could look like

  • Monthly payment: £000.00
  • Total to repay: £00,000.00
  • Calculated APR: 00.0%

Representative 30.5% APR

One way you could lower your monthly repayments is by putting down a deposit on the car. A car deposit can help make your finance agreement more affordable and ensure that you can get a car that suits your needs.

No deposit car finance is when you haven’t got a cash deposit, or you may just prefer not to put a deposit down. Whether or not you need to pay a deposit is based on certain individual factors. Some car finance agreements might require you to put a deposit down.

How does each car financing option work?

When it comes to car finance, there are lots of different types available. It’s important to understand your options and how they differ so you can find one suited to you. Some of the most common types of car finance are:

  • Conditional Sale (CS)
  • Personal Contract Purchase (PCP)
  • Car Leasing, also known as Personal Contract Hire (PCH)
  • Hire Purchase (HP).

We’re going to look at the primary car finance options to give you a clear idea of how each works.

Conditional Sale (CS)

At Moneybarn, we use a Conditional Sale agreement for car finance. This means that you are the registered keeper of the vehicle for the term of the agreement. Once you’ve made your final repayment, the lender will transfer the vehicle into your name. This means that you will legally own the vehicle at the end of the CS agreement.

With CS, you will make fixed monthly repayments over an agreed period. CS agreements usually last between 12 and 60 months. Our agreement terms are between 36 and 60 months.

A deposit is often required, but it depends on your personal circumstances such as affordability.

Conditional Sale car finance diagram

Advantages of Conditional Sale:

  • There may be a low or no deposit at the start of the agreement
  • The interest rate is fixed, meaning you know exactly what you can expect to pay back every month
  • At the end of the agreement, you will own the vehicle – there is no balloon payment
  • CS finance is secured against the car. If you are unable to make the monthly repayments, you can give the car back to contribute to the money owed to the lender.

Disadvantages of Conditional Sale:

  • Monthly repayments can be higher than other car finance types, such as PCP. However, you won’t automatically own the vehicle at the end of other types of agreements
  • You have less flexibility with what you do with the car at the end, as you are automatically the vehicle owner – there is no option to switch to another car, for example
  • The agreement is secured against the car, so your car could be repossessed if you don’t meet your monthly repayments
  • You can’t sell or modify the car without the lender’s permission.

One way you could lower your monthly repayments is by putting down a deposit on the car. A car deposit can help make your finance agreement more affordable and ensure that you can get a car that suits your needs.

No deposit car finance is when you haven’t got a cash deposit, or you may just prefer not to put a deposit down. Whether or not you need to pay a deposit is based on certain individual factors. Some car finance agreements might require you to put a deposit down.

How does each car financing option work?

When it comes to car finance, there are lots of different types available. It’s important to understand your options and how they differ so you can find one suited to you. Some of the most common types of car finance are:

  • Conditional Sale (CS)
  • Personal Contract Purchase (PCP)
  • Car Leasing, also known as Personal Contract Hire (PCH)
  • Hire Purchase (HP).

We’re going to look at the primary car finance options to give you a clear idea of how each works.

Conditional Sale (CS)

At Moneybarn, we use a Conditional Sale agreement for car finance. This means that you are the registered keeper of the vehicle for the term of the agreement. Once you’ve made your final repayment, the lender will transfer the vehicle into your name. This means that you will legally own the vehicle at the end of the CS agreement.

With CS, you will make fixed monthly repayments over an agreed period. CS agreements usually last between 12 and 60 months. Our agreement terms are between 36 and 60 months.

A deposit is often required, but it depends on your personal circumstances such as affordability.

Conditional Sale car finance diagram

Advantages of Conditional Sale:

  • There may be a low or no deposit at the start of the agreement
  • The interest rate is fixed, meaning you know exactly what you can expect to pay back every month
  • At the end of the agreement, you will own the vehicle – there is no balloon payment
  • CS finance is secured against the car. If you are unable to make the monthly repayments, you can give the car back to contribute to the money owed to the lender.

Disadvantages of Conditional Sale:

  • Monthly repayments can be higher than other car finance types, such as PCP. However, you won’t automatically own the vehicle at the end of other types of agreements
  • You have less flexibility with what you do with the car at the end, as you are automatically the vehicle owner – there is no option to switch to another car, for example
  • The agreement is secured against the car, so your car could be repossessed if you don’t meet your monthly repayments
  • You can’t sell or modify the car without the lender’s permission.

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) allows you to pay an initial deposit and take out a loan to cover the depreciation of the vehicle. You then make monthly repayments over the agreed term.

At the end of the agreed term, you can take ownership of the car with a final balloon payment or return the car.

With a PCP plan, you could also upgrade to a different car at the end of your repayment term without making the final payment. You would simply enter into a new finance agreement for the new car and continue with agreed monthly payments. In effect, you’d be carrying out a part exchange.

PCP car finance diagram

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) allows you to pay an initial deposit and take out a loan to cover the depreciation of the vehicle. You then make monthly repayments over the agreed term.

At the end of the agreed term, you can take ownership of the car with a final balloon payment or return the car.

With a PCP plan, you could also upgrade to a different car at the end of your repayment term without making the final payment. You would simply enter into a new finance agreement for the new car and continue with agreed monthly payments. In effect, you’d be carrying out a part exchange.

PCP car finance diagram

Advantages of PCP finance

  • You can keep, swap, or return the car at the end of the agreement
  • Monthly payments can often be lower than other finance options.

Disadvantages of PCP finance:

  • You don’t fully own the car until you make the balloon payment
  • There is a permitted mileage limit set at the beginning of your agreement, and you may be charged if you exceed it
  • Any damage or wear and tear to the car can result in extra charges if you decide to return your car at the end of the agreement.

Advantages of PCP finance

  • You can keep, swap, or return the car at the end of the agreement
  • Monthly payments can often be lower than other finance options.

Disadvantages of PCP finance:

  • You don’t fully own the car until you make the balloon payment
  • There is a permitted mileage limit set at the beginning of your agreement, and you may be charged if you exceed it
  • Any damage or wear and tear to the car can result in extra charges if you decide to return your car at the end of the agreement.

Personal Contract Hire (PCH)

Personal Contract Hire (PCH) plans are also known as car leasing. You’ll never own the car and will simply return it to the dealer or leasing company at the end of your contracted term. There is no option to purchase the vehicle once the car finance term is completed.

You’re required to pay a deposit, and a larger initial amount will result in lower monthly payments. Personal Contract Hire usually lasts two to four years.

Car leasing PCH diagram

Personal Contract Hire (PCH)

Personal Contract Hire (PCH) plans are also known as car leasing. You’ll never own the car and will simply return it to the dealer or leasing company at the end of your contracted term. There is no option to purchase the vehicle once the car finance term is completed.

You’re required to pay a deposit, and a larger initial amount will result in lower monthly payments. Personal Contract Hire usually lasts two to four years.

Car leasing PCH diagram

Advantages of PCH finance:

  • Some leasing options can include service and maintenance costs
  • You won’t have to worry about the depreciation in value of the car as you do not own it.
  • PCH gives the flexibility to change your car as often as you like.

Disadvantages of PCH finance:

  • You have no finance options to buy the car after the car finance period ends
  • Your initial deposit amount may be higher than other finance options
  • PCH agreements usually include mileage restrictions, and you’ll often be liable for penalties if you exceed these
  • There may be additional charges if excess damage or wear and tear are caused.

Advantages of PCH finance:

  • Some leasing options can include service and maintenance costs
  • You won’t have to worry about the depreciation in value of the car as you do not own it.
  • PCH gives the flexibility to change your car as often as you like.

Disadvantages of PCH finance:

  • You have no finance options to buy the car after the car finance period ends
  • Your initial deposit amount may be higher than other finance options
  • PCH agreements usually include mileage restrictions, and you’ll often be liable for penalties if you exceed these
  • There may be additional charges if excess damage or wear and tear are caused.

Hire Purchase (HP)

With a HP finance agreement, you’re borrowing the car’s full value and will repay this in fixed monthly payments, usually over 12 to 60 months.

Unlike a PCP finance agreement, you don’t have to find a balloon payment at the end of a hire purchase term. With a Hire Purchase agreement, a small fee is payable as your ‘option to purchase’.

Hire Purchase car finance diagram

Hire Purchase (HP)

With a HP finance agreement, you’re borrowing the car’s full value and will repay this in fixed monthly payments, usually over 12 to 60 months.

Unlike a PCP finance agreement, you don’t have to find a balloon payment at the end of a hire purchase term. With a Hire Purchase agreement, a small fee is payable as your ‘option to purchase’.

Hire Purchase car finance diagram

Advantages of HP finance:

  • There are usually no mileage limits on HP car finance agreements
  • Once you’ve settled all payments to your finance company, the car is yours, and you can choose whether you want to keep or sell the vehicle
  • Payments are fixed for the agreed duration
  • Unlike PCP, there is no balloon payment at the end of your agreement.

Disadvantages of HP finance:

  • HP agreements don’t usually include servicing or repairs
  • The car is not legally yours until you’ve settled all monthly payments and paid the ‘option to purchase’ fee
  • The agreement is secured against the car, so your car could be repossessed if you don’t meet your monthly repayments.

Advantages of HP finance:

  • There are usually no mileage limits on HP car finance agreements
  • Once you’ve settled all payments to your finance company, the car is yours, and you can choose whether you want to keep or sell the vehicle
  • Payments are fixed for the agreed duration
  • Unlike PCP, there is no balloon payment at the end of your agreement.

Disadvantages of HP finance:

  • HP agreements don’t usually include servicing or repairs
  • The car is not legally yours until you’ve settled all monthly payments and paid the ‘option to purchase’ fee
  • The agreement is secured against the car, so your car could be repossessed if you don’t meet your monthly repayments.

Other ways of buying a car

There are some other options available that you might have considered:

Personal loan

A personal loan can be borrowed from a bank or finance provider for various reasons, including buying a car. It is a lump sum of money that you can use as you like.

Your loan period can vary but will usually last between one and seven years. Personal loans are unsecured, which means they aren’t tied to your vehicle. This means you will legally own the car. You can change or sell the car whenever you wish, but you will still need to repay the loan.

However, the amount you’re allowed to borrow, the interest rate offered, and the duration will all vary depending on your personal circumstances and credit rating. You might find that if you have less-than-perfect credit, it could be difficult to be accepted for a personal loan.

If you’re stuck on whether to choose a personal loan or car finance, our guide might help: Car Finance vs Personal Loan: Which is Best?  Or, if you would like to learn a little more about credit, have a look at our other guides:

Joint or guarantor finance

Guarantor car finance isn’t very common nowadays, but it’s where you apply with another person that is responsible for paying off the agreement if you can’t make your repayments.

We don’t offer that at Moneybarn, but we do offer joint car finance. This is where you apply with another person, and both of your circumstances are considered, which might help you get approved if you’ve otherwise been declined. For more information, see our guide to joint car finance.

Credit card

You could choose to buy a car using your credit card. Provided the purchase price is between £100 and £30,000, you could have additional protection through section 75 of the Consumer Credit Act.

However, some car dealers may add a credit card handling fee. Others may not accept credit card payments at all. An interest rate on a credit card is often higher than interest rates offered on other types of car loan agreements.

If you decide to use a credit card, it may have an impact on your credit file if you miss payments.

Pay cash

If you have a lump sum of money, you might consider buying your car outright.

This would be cheaper than buying a car on finance because you don’t have to pay any interest or other fees like you might with a finance agreement. You would be the legal owner of the car.

You could also use a cheque, but since they take time to clear, many dealers do not accept cheques.

Some people may prefer car finance as it spreads the cost of a car over many years, rather than paying it all in one go at the start.

What to consider before financing a car

When comparing different car financing options, pay attention to the following factors before deciding on the best option for you:

  • Be sure you understand all the involved terms in your potential agreement. You’ll likely come across terms including balloon payments and mile limits. If you’re not sure what any terms mean, ask the lender. Or, you could visit our car finance glossary, which will explain what some of these common financial words mean.
  • Make sure the finance is affordable for your circumstances. You could make a budget to track your income and expenses for the car. Make sure you consider all the costs involved in running a car, not just the cost of the finance agreement. Some of these costs include servicing, MOTs, and fuel.

Why get car finance with Moneybarn?

Financing a car with Moneybarn means you are getting the support you need to live your life to the fullest. If you want to build your credit score or if your credit history isn’t perfect, then we want to help. We’re here for every step of your journey.

We use a soft search at the point of application, which doesn’t affect your credit score. We only run a hard search once you’ve decided you’d like an agreement with us. As a vehicle finance company that wants to help all their customers onto a better road ahead, we accept applications when other lenders might not.

  • Specialise in poor credit
  • We accept IVAs
  • We accept CCJs

We understand the importance of having a reliable car, whether for getting to work, doing the school run or going about your daily life. Our broad finance option should help you find the right car for you.

  • Financing a car from £4,000 – £35,000
  • The car can have a mileage up to 120,000 at the start of the agreement (depending on your loan offer)
  • No more than 15 years old by the end of the agreement (depending on your loan offer)

Other ways of buying a car

There are some other options available that you might have considered:

Personal loan

A personal loan can be borrowed from a bank or finance provider for various reasons, including buying a car. It is a lump sum of money that you can use as you like.

Your loan period can vary but will usually last between one and seven years. Personal loans are unsecured, which means they aren’t tied to your vehicle. This means you will legally own the car. You can change or sell the car whenever you wish, but you will still need to repay the loan.

However, the amount you’re allowed to borrow, the interest rate offered, and the duration will all vary depending on your personal circumstances and credit rating. You might find that if you have less-than-perfect credit, it could be difficult to be accepted for a personal loan.

If you’re stuck on whether to choose a personal loan or car finance, our guide might help: Car Finance vs Personal Loan: Which is Best?  Or, if you would like to learn a little more about credit, have a look at our other guides:

Joint or guarantor finance

Guarantor car finance isn’t very common nowadays, but it’s where you apply with another person that is responsible for paying off the agreement if you can’t make your repayments.

We don’t offer that at Moneybarn, but we do offer joint car finance. This is where you apply with another person, and both of your circumstances are considered, which might help you get approved if you’ve otherwise been declined. For more information, see our guide to joint car finance.

Credit card

You could choose to buy a car using your credit card. Provided the purchase price is between £100 and £30,000, you could have additional protection through section 75 of the Consumer Credit Act.

However, some car dealers may add a credit card handling fee. Others may not accept credit card payments at all. An interest rate on a credit card is often higher than interest rates offered on other types of car loan agreements.

If you decide to use a credit card, it may have an impact on your credit file if you miss payments.

Pay cash

If you have a lump sum of money, you might consider buying your car outright.

This would be cheaper than buying a car on finance because you don’t have to pay any interest or other fees like you might with a finance agreement. You would be the legal owner of the car.

You could also use a cheque, but since they take time to clear, many dealers do not accept cheques.

Some people may prefer car finance as it spreads the cost of a car over many years, rather than paying it all in one go at the start.

What to consider before financing a car

When comparing different car financing options, pay attention to the following factors before deciding on the best option for you:

  • Be sure you understand all the involved terms in your potential agreement. You’ll likely come across terms including balloon payments and mile limits. If you’re not sure what any terms mean, ask the lender. Or, you could visit our car finance glossary, which will explain what some of these common financial words mean.
  • Make sure the finance is affordable for your circumstances. You could make a budget to track your income and expenses for the car. Make sure you consider all the costs involved in running a car, not just the cost of the finance agreement. Some of these costs include servicing, MOTs, and fuel.

Why get car finance with Moneybarn?

Financing a car with Moneybarn means you are getting the support you need to live your life to the fullest. If you want to build your credit score or if your credit history isn’t perfect, then we want to help. We’re here for every step of your journey.

We use a soft search at the point of application, which doesn’t affect your credit score. We only run a hard search once you’ve decided you’d like an agreement with us. As a vehicle finance company that wants to help all their customers onto a better road ahead, we accept applications when other lenders might not.

  • Specialise in poor credit
  • We accept IVAs
  • We accept CCJs

We understand the importance of having a reliable car, whether for getting to work, doing the school run or going about your daily life. Our broad finance option should help you find the right car for you.

  • Financing a car from £4,000 – £35,000
  • The car can have a mileage up to 120,000 at the start of the agreement (depending on your loan offer)
  • No more than 15 years old by the end of the agreement (depending on your loan offer)

FAQs about financing a car

It’s always cheaper to pay cash for your new car than finance. However, car financing enables many road users to purchase a vehicle when they might not have the required amount.

Whether it is “better” to finance a car or buy it outright depends on your personal circumstances.

This depends on the type of finance you use to pay for your vehicle. If you decide to purchase your vehicle with a personal loan, you will legally own the car as soon as you buy it.

With HP and CS, once you’ve made your final payment and in the case of HP the option to purchase fee, you will fully own the vehicle.

PCP works differently in that once you’ve made the final payment, you can put down a balloon payment to cover the remaining balance according to your agreement. PCH is where you lease the car, meaning you don’t have the option to own it at the end of your agreement.

FAQs about financing a car

It’s always cheaper to pay cash for your new car than finance. However, car financing enables many road users to purchase a vehicle when they might not have the required amount.

Whether it is “better” to finance a car or buy it outright depends on your personal circumstances.

This depends on the type of finance you use to pay for your vehicle. If you decide to purchase your vehicle with a personal loan, you will legally own the car as soon as you buy it.

With HP and CS, once you’ve made your final payment and in the case of HP the option to purchase fee, you will fully own the vehicle.

PCP works differently in that once you’ve made the final payment, you can put down a balloon payment to cover the remaining balance according to your agreement. PCH is where you lease the car, meaning you don’t have the option to own it at the end of your agreement.

Improve your credit score

We’ve written a guide that explains how long it takes to improve your credit score, as well as a number of handy tips that might boost your score.

Increase your chances of getting finance

Applying for car finance can feel daunting. But there are some things you can do that might help your chances. Find out in our guide.

Our application process

It is important to completely understand the car finance agreement that you may be entering – find out more about how a conditional sale agreement works.