Car finance – the ultimate guide
Car finance has been an important part of the purchase journey for UK car buyers for decades, but many people are still confused about car finance. Here’s our complete guide to financing a car.
Magnitude Finance’s parent company, the DSG Group, has been operating in the car finance arena for over 30 years, helping hundreds of thousands of people to buy their next car. According to the Finance & Leasing Association (FLA), consumers purchased 2,347,245 cars on finance from dealerships in 2017, so why are so many buyers still confused by car finance?
It’s not entirely surprising given the number of finance options available and the quality of advice being offered, so we jumped at the chance to make this podcast on car finance with a car buyer (Sam of Seen Through Glass), a dealer (Tony of Gravelwood Car Sales) and our very own car finance expert Tim Marlow.
It’s worth watching the entire video or downloading the podcast, but if you don’t have the time, we’ve divided it into FAQs below – just click the gold links to view the specific part of the video.
Car finance explained – by a car buyer, a car dealer and a car finance specialist
Car finance is the process of borrowing money to purchase a car. This is different from car leasing, which is essentially the long-term rental of a vehicle.
Hire Purchase is a type of loan that is secured on a vehicle, rather like a mortgage. Unlike a personal loan, the finance company purchases the vehicle and “hires” it to you until you make the final payment, at which time the car becomes yours – hence, Hire/ Purchase. Find out more about Hire Purchase.
PCP stands for Personal Contract Purchase. This is a very effective way of reducing your monthly payments and offers three different options at the end of the agreement. Find out more about Personal Contract Purchase.
HP with a balloon is a hybrid of HP & PCP which reduces your monthly outgoings compared to a normal HP agreement but doesn’t come with a guaranteed future value. Find out more about HP with a balloon.
Finance brokers connect car buyers with lenders, many of whom do not work directly with the public and will only arrange finance through a broker connection. Brokers typically have access to multiple lenders and can, therefore, offer many different products at more competitive rates than a direct lender.
10% is often ideal, but under certain circumstances, we may recommend putting down a larger deposit. Watch to find out why.
Have you ever wondered why so many people finance cars, even the wealthy? Some car buyers don’t have the cash readily available to buy the car that they want, others have the money available but would rather keep the cash in the bank to use it for other purposes. Tim and Tony explain.
This is a question we often get asked by our younger customers who are building up to bigger and bigger purchases and is particularly important for today’s modern entrepreneurs such as YouTubers. Watch
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Negative equity is the term used when the amount of outstanding finance on a car is greater than its value. Negative equity is an increasing problem as more car buyers opt for PCP agreements with small deposits and often exceed their contracted mileage. The risk of negative equity can be mitigated by taking the right advice.
One of the key factors any lender will look at is affordability. They will need to be sure that any borrower is truly able to service the debt and factors such as income and existing finance agreements are all taken into consideration. You should be sure that you really can afford any car that you finance.
A combination of the three is best. The interest rate will determine how much interest you pay over the term of the finance and also have an influence on your monthly payment, although a percentage point here or there won’t make a big difference to the monthly cost. The monthly payment should be comfortable, but beware of trying to get the biggest balloon payment you can at the end of the agreement to lower the monthly cost. This could leave you with little or no equity at the end of the agreement, or even with negative equity.
Typically Magnitude finance cars over £25,000, but if you are borrowing less than that we can still potentially help. High-street lenders offer some very good deals on smaller balances (see below) which may be more suitable.
Should I get a personal loan and how is it different from hire purchase?
The maximum value for a personal loan is £25,000, which clearly has its limitations but if you are looking for a less expensive vehicle, a personal loan can be a good option. Some high-street lenders offer very low rates but not everyone will qualify for the lowest advertised rates.
One of the key differences between hire purchase and a loan is that on a hire purchase agreement the loan is secured on the car.
What is the difference between a regulated finance agreement and a non-regulated finance agreement? (38:20)
Regulated agreements are covered by the Consumer Credit Act which gives you some important rights, particularly if you want to settle the agreement early. Find out all the details here.
There are perfectly legitimate reasons for signing a business use disclaimer, but if you aren’t using the car predominately for business use and you are a private individual being offered a non-regulated agreement then there may be a more suitable, regulated option.
Of course, this finance guide isn’t completely exhaustive so if you have any questions please get in touch!
Glossary of common finance terms
Balloon – a balloon payment is substantial lump sum payment deferred until the end of a finance agreement which helps bring the monthly payments down.
Equity – equity is the value of the vehicle less any outstanding finance. For example, if a car is worth £50,000 and the outstanding finance is £30,000, the equity would be £20,000.
FCA – Financial Conduct Authority.
GMFV – Guaranteed Minimum Future Vale. This is the value that a finance company agrees to but the car back for at the end of a PCP agreement. The GMFV will always be conditional upon mileage and the car having received fair wear and tear.
Lease – a long term hire agreement for a car.
Lease Purchase – confusingly, a term that is commonly used to describe a hire purchase agreement!
Negative equity – the opposite of equity, when a car’s value is less than the amount of outstanding finance.