Used Car Finance

If you’ve decided to buy a used car but either can’t afford or would prefer not to pay for it using cash or savings, there are a few different options in terms of finance.

It can seem like a bit of a minefield and it's difficult to know which one is right for you – have a look at our guide for some useful information.

Hire Purchase (HP)

This usually involves paying a deposit and then making equal monthly payments for the term of the finance agreement. The payments usually include interest although there can be 0% deals available if you’re looking at the right time. Agreements can last up to 5 years however the longer the agreement the more you’ll pay in interest.

Pros	Cons
Available for people with almost any level of credit history – good or bad there is likely to be a HP deal for you. If you want to own your car when you’ve finished paying for it, this is likely to be the most suitable option.	Although this is true for all finance, if you do have a poor credit history, the comparatively high interest rate will mean you’re likely to pay much more than the car is actually worth.

Personal Contract Purchase (PCP)

This is a more flexible version of HP – there is still usually a deposit payment and the equal monthly payments (normally for 3 or 4 years). At the end of the agreement you can then choose to either hand the car back or pay a lump sum (or “balloon”) payment to own the car outright.

Pros

Cons

Better for people with good credit history. Payments for an equivalent car should be lower than HP as a large proportion of the money borrowed is deferred and you can choose whether to pay it off at the end of the agreement. More flexible than HP – most people decide to hand the car back rather than pay a large sum to own it, meaning you can have a new car every few years.

It can be unrealistic for some people to pay the large balloon payment at the end of the agreement. Dealers frequently encourage people to change cars early, which for some can result in negative equity, and at the very least a continuing cycle of car finance. Unlike HP, there is usually a mileage limit imposed under a PCP agreement which might not be suitable for high mileage drivers. If you exceed the mileage limit you can end up paying a high additional charge when you hand the car back. The car needs to be kept in good condition, as you’ll be charged for any damage to the vehicle when you hand it back.

Personal Loan

Using a bank loan might appeal more than dealer finance if you have a good credit history, as interest rates are usually lower. With some online companies (think Money Saving Expert or Experian) you can compare loan rates and see if you’re likely to get approved without affecting your credit score.

Pros	Cons
No deposit required. Some banks will allow you to take loans for up to 7 years. The car is immediately owned by you. The loan is usually unsecured meaning you can sell the car at any time – although you’ll still need to clear the loan.	Might be more difficult or costly if your credit score isn’t great.

There are also guarantor loans and peer-to-peer lending, although these tend to be less common. This information gives just a brief overview of used car finance options and It’s a good idea to explore all of your options when deciding how to finance a new vehicle – the dealers can have a vested interest in getting you to take their finance agreements (usually in the form of bonuses or commission) so it pays to make sure they’re giving you the best deal for you. They also use take the opportunity to sell you extras like GAP and other insurances, or extended warranties but these can often be better value through a third party, and without the hard sell!