Most cars these days are bought on some sort of finance agreement – nearly 90% of all private new car sales, and up to half of all private used car sales. That means there are millions of people taking out some form of car finance every year to buy their next set of wheels.
But despite the popularity of financing a new or used car, what is still surprising is the lack of preparation that most people put into their car finance decisions. Given that you are taking on thousands of pounds of debt to purchase that vehicle, it is very important that you understand what you are doing and have some plans in place.
Here are a few simple tips that you should follow before you sign your life away on that new or used car.
Understand the types of car finance available to you
Most private buyers will purchase a car on a hire purchase (HP) or, increasingly, a personal contract purchase (PCP). This article explains these types of car finance, and this one specifically looks at the detail of a PCP. If you can claim VAT on your vehicle, then a lease (contract hire or operating lease) may be worth considering.
Each type of finance is different – not just in terms of the monthly payments, but your consumer rights and the terms and conditions of what you need to do to fulfil your side of the contract. Make sure you understand the implications of each type of car finance before you commit to anything so you don’t get caught out later on.
Car manufacturers and dealers will usually push the PCP, as it works out best for them and increases their chances of selling you another car at the end of your term, but make sure it is the right solution for your needs.
Many people talk about ‘leasing’ when they really mean a PCP because the products appear similar, which creates confusion. Your rights and responsibilities are quite different in a lease (like personal contract hire) and a purchase product (like a personal contract purchase)
Knowledge is power, so make sure you know what you need rather than taking what a dealer wants you to take.
Plan for tomorrow, today
Many people get carried away by headline monthly numbers in new car adverts, but you need to understand the overall cost of borrowing and the cashflow implications of different finance options.
For example, a PCP has low monthly payments but a potentially big sting in its tail, whereas a hire purchase has much higher monthly payments but more flexibility and simplicity, and usually costs less overall.
It also means that if you need to change your car before the end of the agreement, you will usually be in a much stronger position with HP finance than PCP finance as you have been paying more of your debt back every month so your settlement will be less.
Many a young person has signed up for a two-seat sports car on a PCP over five years, with a small deposit, only to find that in 18 months’ time, they suddenly have an urgent need for a family estate… Usually, this means they are in a very poor financial position because they didn’t plan ahead (in more ways than one!).
In times of economic uncertainty, it’s even more important that you are not stretching yourself too far in order to buy the car you really want instead of the car you really need. If your circumstances change at any point over the next three to four years (eg – you may be made redundant or have unexpected medical/legal bills), you will need to find a way to keep making your monthly payments.
If you are stretched to your financial limits when times are good, you will quickly get into trouble if you hit a rough patch.
Check your credit score – even if you have good credit history
Finance companies will check your credit history using one of a few credit agencies, such as Experian, Equifax or CallCredit. Your credit history is a complete record of the finance agreements you currently have and have had in the past, as well as applications for credit that you have made.
Your credit score is not as important as the credit agencies would have you believe, as it is calculated from incomplete information and several assumptions. The credit agencies don’t have any of your employment or salary records, or information about your personal circumstances and living costs. However, it is a reasonable starting point to understand your overall financial position, and it is important to study the details of your credit history.
Don’t assume that the information that they hold on you is 100% accurate. This is important, because it can get you application declined even if you have an impeccable credit score and credit history. I was declined for a simple credit card application (I was changing my credit card from Bank A to Bank B) because Experian had me listed at an address that didn’t actually exist.
Getting this sorted out was a complete pain in the rear (and for the record, Experian employees are a bunch of complete muppets, treating people with complete arrogance and taking zero accountability for the information they carry on you), but was necessary if I wanted to get credit for anything from a credit card to a mortgage.
Once Experian had sorted itself out, my credit score was suddenly ‘excellent’ and the bank that had originally declined me suddenly wanted to offer me more credit…
Read all the paperwork thoroughly
Now that you have taken the time to understand the type of finance you are applying for, make sure you take the time to read every quote, offer and contract you are given before committing yourself to anything.
Understand any and all fees involved, all the terms and conditions and your obligations. I cannot stress this enough – it is your responsibility to understand your financial obligations.
Make sure you are given finance quotations in writing. It is an FCA requirement that an agent of a finance company (usually the Business Manager at the dealership) gives you a specific and complete quotation for the exact vehicle you are considering. Simply saying “X deposit and Y per month” is not an acceptable form of quotation.
An FCA-compliant quotation will give you a complete breakdown of all fees and charges, interest, and most importantly, the total cost of borrowing.
Likewise, when you are actually being presented with a finance contract to sign, there are many pages of paperwork which you have the right – and the obligation – to read and understand. Again, FCA requirements mean that you have to be given documents called Pre-Contract Information and Adequate Explanations, which summarise exactly what you are agreeing to.
You have the right to take this information away and read it, although the dealer will absolutely hate that and try and “answer any questions to put your mind at ease” or something similar so that you will just sign the contract straight away. Don’t be pressured into making a hasty decision – take your time and read every page of every document.
Don’t feel embarrassed if you don’t understand some aspect of a car finance agreement. The most popular article at The Car Expert is our explanation of how a PCP works, and the second-most popular article is our introduction to car finance. Plenty of people struggle to get their heads around the concept of a PCP, so you’re certainly not on your own!
Ask the Business Manager to explain anything you’re unsure of, as many times as it takes. Even if you do know what you’re talking about, asking questions is a good test of a sales executive or Business Manager to see how they answer you.
You should expect to be given full answers which precisely address your questions, rather than brushing your concerns aside or giving one-line responses.
Many people assume that they can negotiate on the price of a car, but that the finance deal is fixed. However, virtually all car finance agreements have some scope for negotiation. If you know how much deposit you want to put down and how much you want to spend, the dealer can reduce the price of the car and/or the finance to suit your budget.
Being realistic is the key – just as a dealer has a limited margin to play with on a car, they have a limited scope to work with on interest rates. And you should compare the dealer’s finance offer with what you can get elsewhere, as your bank may be able to offer you a better deal to finance the car.
However, getting a quotation is different from getting approved. Don’t submit a formal finance application until you’re ready to buy, as it will affect your credit score and may reduce your ability to get finance approval.
Making a false application is fraud, which is a serious criminal offence. Don’t lie on your finance application to try and help get your application approved, as it will probably be noticed and you will be declined and blacklisted by the finance company.
This happens fairly frequently, and both dealers and finance companies have little patience for people who lie about their status to try and get finance. Even if it’s not picked up immediately, it could well come back to bite you eventually.
Similarly, you have the right to see exactly what information the dealership is submitting to the finance company on your behalf. If they try and tweak your information to make it more palatable, they are committing fraud and you don’t want to be associated with that.
This applies to any credit application – I once had a phone shop employee try and massage my residential history not long after I moved to London to try and ensure I would pass the approval process, so I immediately left and went elsewhere.
Taking out car finance doesn’t have to be a scary situation, but you will be better off by doing your homework first and understanding exactly what you are signing up to. Rush into it, and you will usually pay considerably for your haste. Good luck!
This article was originally published in April 2014, and was last updated in April 2018.