The Guide to Financing a New or Used Car
Easily Funding Your Next Vehicle
During the last 24 years, Marcus Rockey has provided more than 2,700 private car buyers secure finance for their new car. Alongside traditional Higher Purchase car finance, Marcus has provided Personal Contract Purchase, Lease Purchase and sub-prime (poor credit) finance packages. Here, he shares his experience of all auto finance types and helps readers understand what options are available and which are most suitable for your individual needs.
This comprehensive guide is meant for those serious about accessing some type of car finance to pay for their new car.
During this guide, I discuss what I believe to be as the leading, ethical, affordable lender within the UK. This opinion is based on firsthand experience with multiple lenders across two decades, whilst running several successful car dealerships here in the UK.
The benefits of not borrowing from your bank
Obtaining a bank loan for a new car is viable, provided that you have a good relationship together. However, there are some limitations to high street lending:
- You can only borrow a fixed amount of money. This actually limits your car buying options (more on this in a moment.)
- Usually, you can only borrow from your bank once in a given period (subject to personal circumstances.) If you have an emergency and need to borrow money quickly, you may not be able to ask your bank because of your existing loan(s).
- Interest rates tend to vary, depending on the amount of money you borrow. For example, the less you borrow, the higher the interest rate may be. This means that borrowing just one pound more from your bank could save you hundreds or even thousands of pounds! i.e 10% Bank loan interest on loans up to £5,000, 7.5% interest on bank loans over £5,000 (for example £5,001.)
- There are strict criteria (relating to your credit rating.) If your credit file is less than perfect you will probably find it difficult obtaining loans from your bank.
- Any missed payments or exceeded overdraft limits will be taken into consideration when applying for funds from your bank.
Bank loans for cars was often the cheapest route to borrowing. But these days there are an array of options available to you, with scores of companies vying for your business. It’s largely a consumer’s marketplace.
Narrowing your choices but giving you all of the options
Early I mentioned to you that I’ve taken a lot of the pain out of accessing car finance deals. It means I have worked with many different finance companies and know which financiers to avoid, and which are reputable, ethical and have a variety of options.
Some of the companies I’ve dealt with include Blackhorse Motor Finance, Zuto, MotoNovo, First Response Finance and even Wagon Finance from back in the early 1990’s.
I have also dealt with Creditplus, who are a 10-year-old company, based here in the UK. Of all the car finance companies I’ve partnered with, Creditplus have shown themselves to be an ethical, robust and customer centred car finance company.
Click here to immediately apply.
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They are one of only a handful of lenders that support you to finding the correct car financing option for your personal circumstances, whilst ensuring your end goals are met.
Before applying for finance, Creditplus prefer to find out about your long term goals. In particular, they like to know your intentions once your car is paid off, and your finance is settled. It isn’t a stipulation, but a multi-layered approach to vehicle lending.
This is quite rare in the car finance sector. Most firms focus purely on securing a deal with you and pay little attention to your objectives after your agreement is settled.
The Credit Plus approach encourages potential customers to think about the end of their finance agreement before they’ve even begun it.
These important questions determine which finance option is most suitable for your needs, and your answers will determine the types of finance that meet those needs.
- PCP Finance – Personal Contract Purchase
- LP Lease Purchase – Where you pay a set (usually lower) monthly fee and final balloon payment
- HP Higher Purchase – A fixed loan amount that you pay off until you own the car
The fact that Creditplus prompt this line of questioning shows an important ethical process.
They understand the importance for customers to choose their most suitable finance package for a new or used car.
- They know that aligning their customers with the correct packages means long term relationships, repeat business and ethical lending.
- But most importantly, by having customers think about the end of an agreement before they’ve even applied for car finance, increases the likelihood that their customers will honour their financing agreements and make their monthly payments with no issues.
It’s a win-win situation for Creditplus and their customers. It’s one of the core reasons why I advocate them above all the other lenders throughout the UK. This type of principled approach to car finance deals is wonderful to see, and provides a leading service for their customers.
Creditplus deal with around 100 lenders, including Santander, Private and Commercial Finance, Alphera, Barclays, Paragon Bank and Money Way.
Creditplus are also accredited by the Consumer Credit Trade Association (CCTA), Specialist Automotive Finance (SAF), and have RAC approved dealer status (although in my opinion RAC dealer status is worth very little to consumers, read more on that here.)
They are regulated by the Financial Conduct Authority (FCA), which regulates financial services across the United Kingdom.
Finally, they offer a 14-day customer promise, which basically means…
Quote: “if you opt for our source/supply service, you are entitled to a 14 day returns policy if there are faults with the vehicle that are not corrected, or if it’s sold to you not as described.”
In truth, this policy is not particularly important. Under the consumer credit act, all goods sold must be of satisfactory quality and fit for purpose. That means the responsibility will fall on the car dealership, rather than Creditplus. Just know that the 14 day policy is more of a tick box exercise than a valuable asset towards your car financing options and decisions.
Car Finance Deals
Steps to getting the most from Creditplus
When you first go to the Credit Plus website you may want to visit their credit rating check’ page. Unless you already know your credit file score it’s a good idea to answer their 14 Yes or No questions, (you can carry out this step anonymously, without directly sharing any of your personal information.)
The questions are pretty basic, such as…
- Are you aged between 21 & 65?
- Are you on the electoral voter’s role?
- Are you currently exceeding your credit card limits?
- Have you earned at least £900 per month as an employed or self-employed person, for the last 12 months or more?
Once you’ve completed the questions you get a basic idea of your credit history i.e. Excellent, Good, Fair, Poor, Bad.
Here’s a screenshot of the credit rating check page
Here’s a shot of the results page once you’ve answered the questions
Visit their credit rating check page here.
Loan Repayment Calculator
Next, their car finance calculator gives you an idea of interest rates, loan amounts, loan length, deposit (if any) and monthly repayments. You can use your credit rating check results and add them into the car loan calculator.
Calculate Your Repayments Below
Loan Repayment Interest Rates
APR (Annual Percentage Rate) Simplified
There’s no need to get caught up or confused with APR. Below I’ve created a simple example so everybody can understand it.
If you decide to borrow some money for a new car and the interest rate is 5% a year, you will pay 5% of the amount you originally borrowed. The interest needs to be repaid along with the initial money that you’ve borrowed.
How much does it cost to borrow £1,000 at 10%?
- One year at 10% would cost you £100, equal to £8.33 per month (10% of £1,000)
Remember we are only talking about the interest. You also need to include the monthly payment for the amount you have borrowed and added it to your interest.
Let’s touch base
So far we have found out…
- How good or bad your credit history may be
- How much you’d like to borrow
- How long you’d like to borrow for
- The amount of deposit you want to include
- What the APR is likely to be
- How much your monthly payments are
You have already gathered a lot of information from the loan repayment calculator and 14 credit rating check questions. You’re already a step closer to understanding your car finance options, and buying a new car.
If you are at all uncertain about your credit history I’d suggest heading over to Experian and obtaining your credit file. Experian have a free offer where you can access your report and see what your score is. Click here to visit Experian now.
Understanding Soft Search
Soft search is becoming more popular with lenders. The point of soft search is to allow a lender to browse your credit file and determine if that lender is likely or unlikely to loan money to you. Soft searches DO leave a trace on your credit file but do NOT affect your credit rating like a hard search might.
Hard searches tend to make up about 10% of your credit file score, so having multiple searches in a relatively short amount of time can certainly impact your score rating.
Vitally important is the fact that when a lender sees your report they will NOT see the soft inquiries. So in theory, you can have multiple soft searches with no adverse effect on your credit report (but I’ve not tested this.)
Creditplus have adopted the soft search model and it’s something I certainly advocate. They will run a soft search based on your car finance application and quickly determine if their lenders can support you to financing your new car.
Note that you have to make a car finance application to enable Creditplus to run a soft search. Therefore, it’s important to carry out the other steps listed above, before making an application. Once you’ve carried out the previous steps visit the car finance deals application page.
Car Finance for Bad Credit
Accessing a loan when you have a poor credit history is not a great feeling. Soft search is very helpful in these types of cases. Creditplus can tell you if one of their lenders will loan you money, without making a hard search which could further deplete your credit file score.
Car finance for bad credit means:
- You will pay a higher rate of interest
- You may have to pay a larger deposit (depending on your personal circumstances)
- You may need to nominate a guarantor (again depends on certain factors)
Defining the car finance options available to you
PCP Personal Contract Purchase Deals
- PCP deals generally mean lower monthly payments, as you only pay the difference between the price of purchase, and the estimated value of the car at the end of the contract
- Vehicle depreciation is of no concern
- Only really suitable for those with a good credit rating
- You usually need to pay a larger deposit with PCP
- Maximum of 10,000 miles allowance each year (this is not great and certainly something that puts me off)
Tip – If you opt for a PCP deal I suggest that you choose a vehicle that holds its value.
For example, a Volkswagen Golf TDI Sport 5 Door, or Audi Estate Diesel are both cars that hold their value. This helps because your lender needs to achieve a ‘guaranteed future value’ for your car. The better your car holds its value, the higher that value is likely to be.
At the end of a PCP agreement you have 3 choices:
- Return the car back to the car dealership that supplied it
- Pay off a balloon payment and buy the car. This amount will be set at the beginning of the agreement
- Part exchange your old car in and begin a new finance agreement
LP Lease Purchase Deals
- Usually available to a wide range of credit file types, form poor to excellent
- There is a fixed monthly repayment for the duration of the deal
- No VAT on payments (saving a lot of money)
- You own the car once the agreement is complete
- You may be able to defer up to 30% of the payment at the end of the agreement (this is dependent on a number of factors)
- A balloon payment must be made at the end of the deal (pay attention to that amount)
- Balloon payment will be based on the cars residual value*
- There will be a mileage limitation whilst you are paying for the car
*Residual value pays reference to how much your car will be worth at the end of your car finance agreement. Creditplus and their lenders account for the cars depreciation, mileage (this is why there’s a strict limitation,) and the assumption that the car will be in an average condition for its age/mileage.
Note – excess mileages will result in hefty additional fees. This is not specific to Creditplus and applies across the board, including Motability. You can expect to pay somewhere in the region of 10 pence per mile when exceeding your agreed mileage allowance! That can quickly stack up into hundreds or thousands of pounds, so please be mindful of your annual mileage.
HP Higher Purchase
- Suits all types of credit rating
- Fixed interest rate
- Fixed monthly payment
- The total amount of interest you pay is spread between the monthly payments
- Pay off the agreement at any time*
- No mileage limitations!
- Own the car at the end of the agreement
*If you’re in the financial position to settle off the higher purchase before the end of the agreement you can save yourself some money. But note that you may be charged a fee for doing so. You’ll need to tally up the difference between the savings you make from the interest charges, versus the fee to settle early. Often you’ll find the early settlement fee to be one month’s payment. Again, this is a vehicle finance industry standard, and not specific to any one company.
- Monthly payments are usually higher than that of a PCP or LP deals (because there is not usually a final balloon payment)
- You may be required to increase your initial deposit (this is not always the case but I have known circumstance where it’s happened. This often depends on your credit score)
As with all car finance lending options it is best to buy a car that holds its value very well. If you take out a four or five year, loan on a used car it’s good to know that the car is worth more than the money you owe on it. The alternative is negative equity (where the outstanding finance is greater than the cars value.)
Credit Plus provide solutions for new and used vehicles throughout the UK. They offer a ‘find a car’ service, but my preferred option is sourcing your own car and obtaining a loan through Creditplus.
Visit their website here
Discover more finance options below:
GAP (Guaranteed Asset Insurance)
Car leasing bad credit
Bad credit finance
Paying with a Credit Card
Car bank loans
Car Hire Purchase
The Used Car Guy