Starting your car buying journey and looking at car finance options can be quite intimidating. It may be one of the biggest financial decisions you make beyond buying a home, and between all the different car finance companies, abbreviations and jargon, it can be tough to know what’s right for you.
As a hire purchase specialist, Oodle can offer its customers some great deals for used vehicles. Here, we take you through a simple guide to car finance and finance eligibility, so you can find the agreement that’s suited to your circumstances.
What is car finance?
Put simply, car finance is a way of spreading the cost of buying a car over time, instead of paying the full amount in one go. Lenders will provide you with the money to buy the car you want and you pay them back, plus interest, over time. When you have paid the agreed amount, the car is yours.
Car finance agreements may not be for everyone. However, having one allows you to pay for your car over time. This can be helpful if you don’t have a large amount of cash to pay for a car outright.
Used car finance
When buying a used vehicle you still have a wide range of finance options. The choice varies between lenders but hire purchase and personal contract purchase are widely available.
New car finance
Car financing can be especially helpful when purchasing a new car, where the price of the car can be considerably higher than it is on a used car.
It's worth remembering that when you buy a new car on finance, the car's value is likely to decrease, or 'depreciate’ sharply, as soon as you take it home from the dealership. One of the advantages of buying a used car is that the depreciation is much more gradual.
Types of finance
There are many different types of finance out there, depending on your circumstances, so it's worth doing some research, to make sure you choose the best product for you. Common types of car finance include hire purchase (HP), personal contract purchase (PCP) and personal contract hire (PCH).
Hire purchase (also known as ‘HP’) is one of the most popular types of finance agreements in the UK, due to the flexibility of the agreement. You have use of the vehicle whilst you are paying off the finance agreement.
With HP agreements, you won't own the car until you've paid off everything agreed with your lender, including the "option to purchase fee". If you do fall behind on your payments, your lender may choose to repossess the vehicle, as they are legally still the owner of the vehicle until you've paid in full.
Benefits of hire purchase
There are many benefits to a hire purchase agreement, depending on your financial situation.
- Owning the car at the end of the agreement (provided all payments are made and the option to purchase fee paid)
- Flexible deposit options
- No excess mileage charge
- No large balloon payment at the end of your agreement, as there would be with a PCP agreement.
Things to consider with hire purchase agreements include:
- There are no guarantees you will be approved
- While you are making payments you can't alter, sell or dispose of the vehicle without the lender’s permission
- If you can't keep up the repayments, the car can be taken back
- Interest charges mean that, in the long run, it may be more expensive than paying a cash lump sum.
Personal contract purchase
Personal contract purchase (or PCP for short) is also a common car finance type, but differs quite a bit from hire purchase.
Like HP you can use the vehicle during the agreement but it still belongs to the lender. At the end of the PCP period, you normally have several options, including:
- Paying a significant lump sum - known as a balloon payment – to own the vehicle
- Handing the vehicle back (there may be charges for excess mileage and wear and tear)
- Using value in the current vehicle to put towards your next one - known as part exchange
If you reach the end of your PCP contract and decide that you do want to keep the car, you do have the option to do that with what is known as a ‘balloon payment’ (also referred to as ‘guaranteed future value’)
Balloon payments can be relatively large, depending on the value of the vehicle you're buying and the deposit you initially paid. It's worked out based on what the lender feels your car will be worth by the end of your agreement - this amount will be set at the beginning of your agreement and shared with you before you sign anything, so you won't be surprised. The balloon payment is optional and you only have to pay it if you want to keep the car.
Personal contract hire
Personal contract hire (also known as PCH) differs from standard contract hire, which is usually only available for businesses. The main difference is that PCH is available for individuals rather than companies, and it's a popular way to 'lease' a car.
With personal contract hire agreements, you normally:
- Pay an initial rental upfront - often between 1-12 months (sometimes more) of the monthly payments due under the agreement
- Agree to lease the car for a set period
- Have use of the vehicle but do not build up any ownership of it
- Have to return the car at the end of the agreement when there may be further charges for excess mileage and/or unreasonable wear and tear.
Unlike HP, you won't own the car at the end of the agreement and you don't have the option to, as you would with PCP, so it is worth considering whether car ownership is a deal-breaker for you.
Commonly asked questions about car finance
- Am I eligible for car finance?
When you apply for car finance, you’ll be subject to credit checks and certain eligibility checks by your lender to help them decide whether they’re able to offer you a finance agreement. You will need to provide proof of:
- Age (all applicants must be aged 18 years or over to be considered for car finance)
- Address (typically you’ll have to show where you’ve lived for the past 3 years)
- Earnings (personal, and household if you have dependants such as children)
- Employment status
- A full or provisional, valid UK driving licence
- Guarantor (if requested by your lender)
Oodle doesn’t request guarantors but may ask for a ‘joint applicant’ to support your application if the amount you want to borrow is deemed to be outside of your affordability. The joint applicant will be accessed across income, residential status, totals for outstanding credit and the level of affordability, and will become a joint customer listed on the agreement.
Vehicles financed by Oodle will need to meet certain criteria for us to be willing to finance it (e.g., age, mileage, price, condition etc.).
Although not everyone will get a finance deal, there are options available and, even if you do have a low credit score, it is worth checking to see what might be available.
- Can I get a car loan if I have a bad credit score?
You don’t necessarily have to have a good credit score to be approved for car finance. Some lenders are willing to help borrowers with a poor credit score, and a few even specialise in poor credit history finance.
So, if your credit score isn’t great, it doesn’t necessarily mean that you won’t be able to finance your car. It just means that you might have to shop around to find the right lender for you.
- Will applying for finance affect my credit score?
When you apply for car finance, many lenders will start with what is known as a ‘soft credit check’ as part of the application process. This type of credit check won’t impact your credit score.
If you’re unsure about your credit score and would prefer to know before applying, you can check your credit score for free on these sites:
Not all lenders offer a soft credit check, but those who do should make it clear at the beginning of the process - as we do at Oodle.
We will only register what is known as a “hard search”, which is visible by other lenders if you are approved for finance with us and you decide to take up that finance. This is done once you have signed your agreement with us.
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