When purchasing a big-ticket item like a new car, not everyone has the ability to pay up in full.

This is where car finance comes into play…

Being able to break down such a cost into bite-sized payments makes buying a new car so much more affordable to many.

There are several aspects to car finance and, at first, can sometimes be a tough topic to grasp.

And so we’re about to go in-depth, covering several key areas of car finance, helping potential car buyers get a solid understanding of how to approach it.

How car finance works boils down to the following basic aspects:

• Cost of the car is broken down into monthly payments
• Payments are made of over a number of years; usually between 3-5 years
• A deposit is typically put down at the start, which can help reduce the monthly cost
• A rate of interest is placed upon the agreement as a charge for credit
• Depending on the finance type, you’ll either own the car when all payments are made, or you’ll have options of what to do next

There are several car finance types - most prominently used are Hire Purchase (HP) and Personal Contract Purchase (PCP).

HP is great for those who like to own their cars, while PCP is perfect for anyone looking for flexibility in their car finance deal.

Hire Purchase (HP)

Commonly used by car buyers when purchasing a used vehicle, HP is a straightforward car finance option that’s perfect for those looking for full ownership.

A deposit is typically put down at the start of an agreement, then monthly payments follow for the agreed term.

Then, once the final payment has been made, ownership of the vehicle is complete.

Personal Contract Purchase (PCP)

PCP car finance is a more flexible option when compared against an HP deal, and differs in a few ways.

Much like HP, a PCP contract usually starts with a deposit and subsequent monthly payments.

However, unlike HP, these payments only pay towards a certain amount of the car’s value, as much of the cost is tied up in what is called a GMFV (or sometimes a ‘Balloon Payment’).

So effectively, the monthly payments are only covering the cost of the car’s depreciation during the contract term.

Because of this, the monthly payments are typically cheaper when compared to an HP deal for the same car.

Other differences to HP include an agreed annual mileage for the length of the contract, and potential excess charges for mileage and wear & tear.

When all the monthly payments have been made, and only the GMFV is left, there are a few options available:

• Pay the GMFV and take full ownership of the vehicle
• Use any equity in the car to use it as a part exchange for a new one
• Hand the car back and walk away (potential charges for excess mileage and wear & tear can apply here)

How you decide on which option you choose will largely depend on the value of the car.

The GMFV is the car’s Guaranteed Minimum Future Value - this won’t ever change at any point once it’s been set.

When all monthly payments have been made, and the car’s actual value is more than the GMFV, then you’ll be in equity.

Example: the car is worth £7,500 and the GMFV is £5,000 - you’ll be in £2,500 of equity.

This difference can then be used towards the deposit of a new car.

If the car is worth the same or less than the GMFV, then you might just be best handing it back.

Of course, if you wish to own the car, then you’ll need to pay the GMFV to take full ownership.

Credit score

At the heart of any application for credit, a person’s credit score (or credit rating) makes a big difference to the finance deal they get - or if they are eligible for finance at all.

There are several agencies who can tell you your credit score - often for free - and it’s always good to know what yours is so you know where you stand when applying for new lines of credit.

Assuming you are eligible for car finance in general, the interest rate you are offered will be based predominantly on your credit score - those with better scores will be offered better rates and vice-versa.

Your credit score will also affect the maximum amount you’re able to borrow as a whole.

‘Soft search’ v ‘hard search’

When applying for car finance, it’s possible that you’ll go through two stages - one to check your initial eligibility and another later down the line to do a full credit check.

The former is referred to as a Soft Search, and takes a snapshot of your credit score as well as your general affordability to take on a new line of credit.

Meanwhile, a Hard Search comes at the end of your application, and is a full search of your credit file.

The first of those searches does not appear on your credit profile, and so cannot be seen by other lenders - this means that your credit score will not be harmed by a Soft Search, regardless of the outcome.

However, with a Hard Search, as this is a full search on your profile, this will remain visible to all prospective lenders for around 6-12 months - if you are turned down for credit, this will also show against your profile.

Pre-approved car finance

As already touched on, it is possible to get pre-approved for car finance before heading into a dealership for a new car.

At Stoneacre, this journey includes both Soft & Hard Searches as described above.

Our online form performs an initial check of your car finance eligibility, before you’re put in touch with a dedicated coordinator who will take you through the rest of the process on the way to a full credit check.

If you receive car finance pre-approval, you will be given a maximum lending amount that you can then use as a budget for a car at one of our showrooms.

What does having bad credit mean?

While the bracket will work differently on where you check your credit score, to have bad credit is to have a score that is fairly low on the scale.

For example, on Experian, anything between 561-720 (out of 999) is seen as ‘Poor’, which is effectively a bad credit score.

If you fall into such a bracket, being approved for finance is still possible, but you can be affected in the following ways:

• Your rate of interest will be higher than normal
• The amount you’re able to lend will be reduced

Bad credit lenders

Something that allows us to help so many people with bad credit obtain car finance is the panel of lenders we are partnered with.

Many lenders we work with are flexible in nature, and are in a position to help those with a poor credit score get car finance.

As a broker, we’ll be able to work with you to find you a lender that suits your needs the best, including those who have bad credit and may have had trouble getting accepted for finance in the past.

To be eligible for car finance when on benefits, you’ll need to be receiving one of the following:

• Universal Credit
• Housing benefits
• Disability allowance (DLA)
• Carers allowance
• Personal Independent Payment (PIP)

Pensioners & low income

Buying a car on finance is also a possibility for both pensioners and those with low income.

Pensioners - must have a full driving licence, and be on the electoral roll at their current address.

Low income - must have a monthly income of at least £1,000 after tax; a joint application can be made if you fall under this threshold.

How does it work?

Based on a Hire Purchase contract, PAYG car finance works through the installation of a ‘black box’ in your car’s dash - this box will connect itself to your car’s computer, as well as with the lender via GPRS.

With that in place, as long as you make your car finance payments, the car will continue to run as normal.

However, in the event of a missed payment, the box can then disable your vehicle (only when it’s switched off and stationary).

Reminders about upcoming payments are sent out days before they are set to be received.

Additionally, the box itself will show a green light until a few days before payment is due, at which time it will turn red as a further reminder.

Once all payments have been made, ownership of the car is passed over to the driver.

Getting car finance as a young driver

What’s worth mentioning from the off is that, if you’re under the age of 18, you’ll not be able to apply for finance, as lenders require an applicant to be at least 18.

The next aspect to consider is that, given your age, you probably won’t have much of a credit history.

Because of this, you may be seen as having bad credit, based on the fact that you’ve not yet been able to show evidence that you’re responsible at lending money.

While this does make things tricky, it doesn’t make them impossible.

Additionally, when considering buying a car on finance as a young driver, it’s far more likely that Hire Purchase is going to be the finance option available to you - Personal Contract Purchase is usually harder to be approved for with a low credit score.

The amount you’re able to lend will also be more limited compared to drivers who have a stronger credit history - interest rates will likely be higher than normal, too.

Getting car finance without a deposit

When applying for car finance, you’ll need to inform the lender or the broker at the start that you don’t intend to put down a deposit on the vehicle as part of the deal.

This might be because you have no outgoing car to part exchange, no available funds to put a cash deposit down, or you just don’t want to make a deposit in general.

With this in mind, the deal will be structured around this circumstance, and you’ll be given your figures as normal, such as the monthly payment.

If all is acceptable at your end, then the agreement can go ahead as any other car finance deal.

How does 0% car finance work?

The primary aspect of 0% car finance is that there is no charge for credit on the finance agreement when buying a car.

How this works is very similar to any typical car finance deal, in so much that a deposit is made and monthly payments will follow for a set term.

Slight differences to how 0% car finance works compared to a regular deal include:

• A bigger deposit than normal may need to be put down
• 0% finance requires the applicant to have a high credit score to be accepted
• Availability on used cars may be limited

You’ll find 0% finance deals mostly on new cars, with many manufacturers using the product as a strong incentive towards their vehicles.

What does a car finance lender do?

When applying for car finance, it is likely that you’ll work with a broker to facilitate the deal.

In the case of buying a car from Stoneacre, we would act as the broker.

However, when credit checks are made as part of your finance application, the lender is the one taking a look at your credit profile to consider whether you are eligible for finance.

If you’re accepted for credit then, via the broker, you’ll go through and sign all the paperwork en route to getting your car.

It is then down to the lender to cover the cost of the car, and it is them you pay back on a monthly basis until the car is paid off or you wish to trade it in.