As with most countries, buying a car is usually relatively expensive. In the UK, the average price of a brand-new car has increased by 39% over the past decade. Therefore, if you want to own a car in the UK, you need to know the best car finance options available to you.
How much does a car finance cost in the UK? This is a common question asked by people looking to acquire a car. The reality is that the cost will depend on several factors like the overall interest rates in the country, the cost of car you are buying, the amount you put down, the duration of the loan, and the charges by the bank. According to studies, the average amount of car loan taken by people between 24 and 44 years is £9,633.
You can shop around from bank to bank. However, the best way to compare prices is to use Money Supermarket, which is the most popular loan comparison company in the UK.
How MoneySuperMarket Works
As mentioned above, the best way for you to compare car loans is to use MoneySupermMrket. The company works in a very simple way. First, you visit the website and select the type of loan you want to use. In this case, you select a car loan. Second, you answer simple questions such as your income, where you live, and the amount of money you are borrowing. After you do this, you will find the results.
Benefits of a Car Loan
There are several benefits of getting a car loan. Some of the most important benefits are:
- Low interest rates. In the UK, interest rates are at a historic low. This means that your monthly payments for the loan will be significantly low.
- No collateral. Many banks and other lenders don’t ask for any collateral for the loan. The car is the only collateral.
- Bad credit score. If you can show that you make money, you can get car loan with bad credit.
- Improve your credit score. A car loan is an excellent way of improving your credit score if you can pay it well.
- Good for budgeting. A car loan will help you budget more because you don’t need to spend a lumpsum amount of money in the first place.
What to Consider Before Taking a Car Loan
There are a few things you need to know before taking a car loan from any car financing institution in the UK:
- Consider your financial position. You should only take a car loan if you can comfortably pay it. As such, look at your income and other outstanding debt.
- Consider the car you are buying. We all want a good and classy car. However, only spend money on a car you can afford comfortably. Also, consider a car that you can afford to maintain.
- Shop around. Consider the interest rate charged by the bank. As such, we recommend that you shop around to find a bank that has lower interest rates.
There are many options for buying a car in the UK. These are some of the most common options you have to finance your car.
The first and most common option that you have when buying a car in the UK is a bank loan. A bank loan is any amount of money you borrow from a bank with the goal of buying a car. With more than 300 banks and building societies, you will be certain to get a good bank that will lend you money to buy a car.
Car Finance Companies
Another option is obtain a loan from car finance companies such as Zopa. There are many lending companies in the UK specialising in car loans. Take your time to do a thorough research before you make your final decision. Look at their eligibility requirements, minimum and maximum amount, loan duration, interest rate, etc.
Car Hire Purchase UK
Another popular way of financing your car in the UK is through hire purchase. In fact, a fifth of all cars bought in the UK are bought using higher purchase. As the name suggests, the idea behind hire purchase is simple. You essentially hire a car over the period of a contract with the option of keeping it at the end. The difference between a car loan and a hire purchase is that in the former, you own the car while in the latter, the car company owns the car. Another difference is that with a loan, the debt is secured against the car.
How Car Hire Purchase Works in the UK
The first step is for you to visit a car dealer and see the car you want to buy. The dealer will typically ask you to pay 10% of the car’s value. After that, you take the car and then make monthly instalments to the dealer. Here’s an example. You find a car that is priced at £20,000 and you decide to use hire purchase. In this, you will pay the car company £2,000 or 10% of the value of the car. You will be left with £18,000 to pay. Let’s say that you decide to pay the money within five years and the seller gives you an APR of 5%. It means that you will be paying £525 per month. In total, it means that you will have paid £20,900 for the car.
Benefits of Hire Purchase
- Flexible terms. Terms start from one year to five years, which is relatively flexible to most people
- Better car. Since you are spreading the cost, you can get a better car.
- Simple. Hire purchase is a simple way to arrange and understand.
- Widespread. Virtually all car dealers offer this financing option.
- 0% finance. If you do your search well, it is possible to get a 0% finance.
Personal Contract Purchase (PCP)
A personal contract purchase is another option you have to buy a car. Unlike ordinary car loans and hire purchase, personal contract purchases are not very popular because they tend to be relatively complex. A PCP is usually a loan that you get to buy a car. The difference with the other loan we looked at is that with PCP, you will not be paying off the full value of the car. Also, you won’t own the car at the end of the deal unless you choose to. The first step is to visit a car dealer and spot a car that you like. You should then pay a deposit, which is usually about 10% of the car’s price. Some car manufacturers can help you finance this deposit. After this, the dealer will do calculations to estimate the value of the car over the time of the deal. A typical APR of such a deal will be between 4% and 7%. After you complete paying, you can decide to pay for the car in full.
Example of Personal Contract Purchase
You find a car selling for £20,000. The company does the math and decides the car will be worth £8,000 after three years. In this case, you will pay 10% of the value of the car (£2,000). Now, with the present value of the car, you owe them £18,000. But, the car company believes that the value of the car will be £8,000. Therefore, you will pay £10,000. When you finish the payment, you can pay the final £8k or return the car.
Be careful and read the terms and conditions. Most companies will have a mileage limit. As such, if you go past the mileage, you will need to pay the company money.
Car Leasing in the UK
Finally, another option to finance your car in the UK is to lease it. The idea behind a lease is simple. You find a car dealer that offers leasing, you decide on the monthly price, and then you are given the car key. You will then return the car after the lease period ends. Before you are given the car, you will need to give a down payment, which is typically about 10% of the value of the car. We recommend that you use websites like CarWow to compare leasing options.
Benefits of Leasing a Car in the UK
Leasing a car in the UK has several benefits like:
- The monthly charges are typically less than the other options.
- A credit score check is not necessary.
- You can drive a better car while paying less.
- Warranty and tax are applied in the lease.
There are many options to finance your car. The best option is usually to pay a lump sum amount, which is not possible to many people. Still, you can evaluate the options we have mentioned and see the one that is better.