[ 9 min read ]
Looking forward to getting a new set of wheels?
A new vehicle often costs tens of thousands of pounds – a big price tag to pay in one go!
In an ideal world, you would save up and pay it in one go – whether your old vehicle needs replacing; or it has been written off; or you need more seats for a growing family; or a commercial vehicle for your expanding business – but the demands of life may mean you need a new set of wheels sooner than you can save for it.
Vehicle finance is one way to spread the cost of a vehicle over several months or years, however, there are risks and costs involved, so it is important to do your research and compare offers before taking out any credit.
What are the different types of vehicle finance?
There are several ways to finance your new vehicle with credit, here are the main ones:
Personal or Business Loan
A personal loan or a business loan could give you enough money to buy a vehicle outright. You’ll then pay the loan back over a set length of time, usually at a fixed interest rate.
One advantage of a personal (or business) loan is that it is unsecured, meaning you don’t have to use an asset (such as your vehicle or house) as security. Security is something the lender can forcibly sell to get their money back if you can’t repay them. An unsecured loan means less risk for you, but more risk for the lender, so you (or your business) may need a good credit score to get approved.
It is sometimes easier to get approval or a better rate by applying for a loan that is secured against your vehicle or an asset if a business loan. However, you may lose the vehicle (or asset) if you can’t keep up with repayments.
With a vehicle hire purchase agreement, you’ll usually put down an initial payment to take the vehicle away. You’ll then make monthly payments towards the cost of the vehicle, but you won’t actually own it (or be able to privately sell it) until the final payment has been paid – along with an extra ‘option to purchase’ fee, usually around £100-£200.
This is quite different from buying a vehicle with a personal or business loan – where you’d buy the vehicle outright at the start of your repayment plan.
What’s more, with a hire purchase agreement your debt is secured against the vehicle – so if you stop making your payments, the company may take the vehicle off you to recover the money you still owe.
Note that if you end a hire purchase agreement early, you may have to pay a penalty fee.
Find out more about:
Business Hire Purchase Personal Hire Purchase
Some vehicles come with a finance option, whereby you would put down a deposit and pay the remainder in monthly instalments. You may need a large deposit for this option, and your monthly payments may be quite high. But the upside is that you shouldn’t have to pay any interest on the debt, as long as you stick to the term of the agreement and make all your payments on time and in full.
When you lease a vehicle, you do not ever actually own the vehicle, you just make regular rental payments for using it. How much you are charged is usually based on the value of the vehicle, how long you will use it for, and the agreed mileage allowance.
You may pay less each month than if you were paying off a vehicle bought on credit, but there may be extra costs involved. As an example, if the vehicle is a bit scuffed up at the end of the lease, you may be charged an "excessive wear and tear" fee – check the BVRLA Fair Wear & Tear guide for more detailed information on what is accepted and not. Please note that not all finance companies adhere to this BVRLA Fair Wear & Tear guide.
You will need fully comprehensive vehicle insurance, or any damage to the vehicle will need to be paid for out of your own pocket when you return it. Some companies may insist you also take out GAP insurance – Guaranteed Asset Protection – is designed to cover the difference between the total amount of finance outstanding against your agreement, and the insurance value of the vehicle following total loss, which gives both yourself and the funder more protection against damage or theft.
Find out more about:
Personal Contract Purchase (PCP) / Business Contract Purchase (BCP)
PCP or BCP finance agreements are two of the most common forms of new vehicle finance, but they can also be one of the most complex. With Contract Purchase you won’t buy the vehicle outright. Instead, you'll put down a non-refundable deposit towards the vehicle’s price, and borrow the rest. You’ll then make monthly payments to cover interest and the cost of depreciation – what the vehicle loses in value while you have it.
At the end of the contract, you will usually have a few options:
- Buy the vehicle outright – you’ll need to pay the value of the vehicle (usually agreed at the start of your contract) minus your deposit, there may also be an additional fee.
- Trading it in for a replacement with a new Contract Purchase.
- Returning it – there won’t be anything more to pay, as long as you’ve kept to the terms and the vehicle is not damaged.
Contract Purchase agreements are often used by people who like to change their vehicle regularly. They carry the advantage of being quite flexible, and they usually offer low monthly payments since you’re not paying off the vehicle.
However, the interest rates are often higher than other types of finance agreements. You should also read the small print very carefully, in particular, watch out for penalty charges for exceeding the mileage allowance – there is an extra cost per each mile driven outside the stipulated on the agreement – and for damage to the vehicle while you’re using it – check the BVRLA Fair Wear & Tear guide for more detailed information on what is accepted and not.
Note that to get approved for a Contract Purchase agreement, you will usually need a good credit history, especially for 0% or low APR deals.
Find out more about:
Business Contract Purchase Personal Contract Purchase
0% purchase credit card
Buying your vehicle outright on a 0% purchase credit card could be another option, as many car dealers now accept credit cards.
Generally, you will need a good credit score to get a high limit on a purchase card. So this option may be most suitable for people with good credit, or those who are looking for a second hand relatively cheap vehicle.
A credit card can allow you greater flexibility – you can decide how much to pay off each month – as long as you meet the minimum repayment.
With a 0% purchase card, you will not pay interest on your purchase for a set period of time.
Just make sure you meet the minimum monthly payments on time and in full, otherwise you may lose the promotional rate. Also, it’s a good idea to pay off the debt before the promotional period ends, to avoid paying interest on the lender’s standard rate.
Will I get accepted for vehicle finance?
A good credit score can boost your chances of getting accepted for vehicle finance, and at the best rates. Lenders work out your credit score based on information from your credit report, plus your application details – like your income – and any data they already hold on you – if you are an existing customer.
You can check for your Credit Score free of charge – simply search online for "free credit score check" and you will be given plenty results – this can give you an idea of how finance companies may see you.
You may also want to read our 4 tips to help improve your credit score, where you can find some useful information.
Can I get vehicle finance if I’m a young driver?
If you’re a young driver you might have little to no credit history. This can make it harder for companies to judge your ability to make repayments, meaning you’re less likely to get accepted.
Luckily, there are steps you may be able to take to build your credit score.
Alternatively, you could consider getting a guarantor loan – which allows someone like a parent or friend to "guarantee" you will pay the debt back.
What do I need to know before applying?
Before applying for a leasing agreement to finance your new vehicle, here are some key things to consider:
- How much do you need to borrow?
- How much can you afford to repay each month?
- What type of rate are you getting? If it’s variable, can you afford a rate rise?
- How long do you want to spend repaying the finance agreement?
- How much are you willing to pay in interest overall?
- Do you want to own the vehicle, and how soon?
- How long before you replace your vehicle again?
- Are you comfortable with a mileage limit? How much mileage will you do?
- Are there additional costs involved, e.g. extra insurance or penalty fees?
Finally, remember that getting a vehicle involves ongoing costs. If you take your leasing agreement without maintenance included, you will need to pay for insurance, road tax, MOTs, fuel, repairs, and more. Alternatively for a few more pounds per month, you can add the Funder Maintenance to your agreement that will cover most of the extra costs.
Before you commit to a vehicle finance agreement, make sure you can afford the monthly payments on top of the costs of running a vehicle – plus all your other financial commitments – which could change over time.
Missed repayments can have a serious impact on your credit rating, making it harder for you to get credit again in the future.
How should I manage my vehicle finance repayments?
Once you’ve got a vehicle finance agreement, it’s important to manage your repayments responsibly to protect your finances and your credit score. Here are some top tips to follow:
- Stick to your monthly repayments – making them on time and in full – to avoid extra charges and negative marks on your credit report
- Budget for the month ahead to ensure you have enough to cover your repayment
- Consider setting up a direct debit so you never miss a payment by mistake
- Try not to take out more credit while you’re paying off your vehicle finance agreement, as this could put your finances under pressure and lower your score
If you have any queries feel free to give us a ring on 01424 863 456 or drop us one email on [email protected].