Complete Beginner’s Guide to Car Finance: Everything You Need to Know

The Complete Car Loan Guide

Buying a car is not only one of the most important practical decisions in a person’s life — it is also one of the most important financial decisions. Since most people cannot afford to buy a new automobile outright, dealers offer a number of financing options to make their stock accessible and affordable. These options are also a way for the automotive industry to increase their profit margins, so it is important to know which choice is best for you — not just beneficial for your dealer. Fortunately, most people can find an option that suits their budget and interests.

Some buyers do not know that there are ways to pay for a new automobile that do not involve financing through a dealer or broker. In fact, some of these may be more financially feasible. This article goes over many of the various car financing schemes to help you figure out which best fits your needs. As always, it is a good idea to talk to a financial adviser to help you figure out what you can afford and how to fit your needs with your budget.

Dealer Financing

Most dealers offer three types of financing when you go to buy a new vehicle. These are known as:

  • Personal Contract Purchases (PCPs)
  • Personal Leasing or Contract Hires
  • Hire Purchases (HPs)

These options are standard for vehicle purchases. They have various benefits and drawbacks, so it is important to carefully note what you are being offered before you agree.



Personal Contract Purchases

Personal contract purchases usually require a lump sum deposit to open the agreement and a lump sum known as a balloon payment to close the purchase. You will agree to pay a set number of monthly payments over the duration of the contract between these two lump sums. You will also have the option to simply return the vehicle after the monthly instalments have been paid or sell it to pay the remainder of the sticker price.

These options are available because personal contract purchases are based on minimum guaranteed future values, or MGFVs. This means that dealers set what the car will be worth at the end of the contract, so long as you make sure to maintain the vehicle according to the stipulations of your contract. These requirements typically involve maximum mileage and maintaining the car’s condition over time.

Since you do not own the vehicle until the contract and payments are complete, you should bear in mind that the value of the car at the end of the contract is extremely important. For this reason, personal contract purchases might be a better choice if you plan to buy a new car every few years. However, they may not be the right option for you if you plan to keep your vehicle long term, as it can become more expensive than other finance plans.

Car Finance



Personal Leasing

Personal leasing is similar to personal contract purchases in several ways. These plans also involve upfront deposits and monthly instalments, as well as limits on your mileage and vehicle maintenance stipulations. Unlike a personal contract purchase, however, you do not buy the car at the end of a personal lease. Instead, you can switch it out for another vehicle. What limits you agree to and how long the lease lasts determine the costs of this plan, and it is fairly common for three months’ worth of payments to be required at the beginning of the lease. That said, many personal leases involve service benefits, which help you care for the vehicle according to the contract requirements.

This payment option may be helpful for people who do not want to purchase a vehicle or pay for the hassle of maintaining one. However, it is important to look at the fine print and determine if it will be cost-effective in the long run. Pay especially close attention to the monthly cost and annual percentage rate (APR) being offered in addition to the sum of the lease. Depending on your contract, there may also be other associated charges.

Hire Purchases

A hire purchase is like personal contract purchases and personal leasing plans in that you do not own the car until you have finished paying your full sticker price. This means that you cannot sell the vehicle until you complete the purchase without permission from your dealer. You will make monthly payments toward the total cost of the car in addition to your predetermined interest rate until you finish your payment plan, at which point you own the vehicle. It is fairly common for dealers to require roughly 10 per cent as a lump sum deposit when starting a hire purchase.

These financing schemes can be convenient but more expensive than other options. There is also the real possibility of your vehicle being repossessed should you not make your payments. If your financial situation or transportation plans change after signing, you can return the car and end your contract.

Dealers will usually offer you a series of extra options to add to your financing plan since these increase their profits. However, it is absolutely vital that you look over the fine print on these options; you may have decided that you do not need what is being offered or that it is not worth the extra cost. Your dealer might also offer you minor damage insurance to cover any damage to the car that might affect its value, but you have the freedom to refuse if this is not something you are worried about. On the other hand, some dealers also offer asset protection, giving you a measure of price protection if your vehicle happens to be stolen.

These kinds of financing options are almost always more cheaply available from a third party, so be sure to compare your options rather than simply going for what is most convenient. Even if you decide to look into packages like this, it is smartest not to sign on the dotted line before you have the full scope of choices. Also bear in mind that dealers have a good deal of wiggle room with pricing, and there is no harm in pushing for a lower cost.

Independent Financing Plans

In addition to financing plans offered directly by your dealership, there are also independent options that may be available to you. Assuming that you cannot buy your new vehicle outright with cash, you may be able to buy it using a credit card, a personal loan, or a mortgage. These are common alternative options since most buyers simply do not have the funds put away to cover such a large purchase all at once. Each of these plans has its own benefits and drawbacks.

Credit Cards

Credit cards offer a great deal of flexibility in making big purchases, such as a new vehicle. If you have the adequate credit to make a large purchase, this can be a simple way to acquire a car with a lower interest rate than any you would find through a dealer. On the other hand, this is not always the case. Depending on your credit card agreement, the APR may even be higher than what your dealer offers. Dealers sometimes inflict additional charges for using a credit card, and some do not accept them at all. It is important to bear these points in mind as you browse your vehicle purchase options among various dealers — and as you look into new credit cards in the future.

Personal Loans

Personal loans, like a credit card, allow you to borrow a large sum of money and use it to make a large purchase. You will be able to pay the entire cost of the car upfront, then pay your lender back over a predetermined amount of time.

The benefit of a personal loan is that there is no required lump sum deposit at the beginning of your payment plan, so you will not have to come up with a large chunk of money or draw heavily on your savings. You will also be able to choose the timeframe of your loan from a variety of options. While the APR may be higher on a bank loan than on a dealer loan, it may also be more affordable to pay less money over a longer period than vice versa. Another benefit is that you will own your car as soon as you drive it off the lot.

Like credit cards, however, personal loans depend almost entirely on your credit rating, so they may not be an option for you is your credit needs work. There are also various charges or fees associated with the terms of the loan, such as paying it off too early or making late payments. And, of course, since you own the vehicle, you are totally responsible for maintaining it, and any value depreciation falls on your shoulders.

Mortgaging Options

Mortgaging a new car is something many people find to be a workable option. These plans work by adding the cost of the vehicle to a previously existing mortgage. The benefit of these plans is that mortgage interest rates are presently at a low point, which means they are a cheaper upfront option than many other financing plans.



Not everyone wants to put their home at risk if they run into unforeseen financial difficulty, however. Additionally, depending on the amount of time left on your home loan, you may end up paying more for the car over the life of the mortgage than your vehicle is actually worth.

Tips for Weighing Your Options

Because financing schemes exist not just for the buyer’s convenience but also to increase dealers’ profit margins, there is a lot of room for negotiation in setting terms and conditions. Keep this in mind as you talk with your dealer; the price they list is not necessarily the best deal available to you. Not only is it completely appropriate for you to negotiate a better deal for yourself, it is also in your own best financial interest. There is no reason to pay more for a vehicle than you have to, and you are under no obligation to agree to a purchase. Dealers know this, though it may be something buyers forget. You do have options and, if you are not getting what you think is a fair deal, you can always walk away.

Take in the complete picture of your financing options. Look at what it will cost you in both the short and long terms, but give preference to the long term. Remember that what looks like a good deal right now may not be so later on. Are the payments something you can realistically afford? Are the fees what you consider fair for a new car? Is the monthly payment rate worth what you might have to pay at the beginning and end of the contract? These questions are all important points to consider while comparing your options for financing your vehicle.

It is always prudent to avoid signing any paperwork or agreeing to any terms before you have a chance to review your documents at home for a few days. You should never let a dealer or other financer pressure or rush you into making such a significant financial decision. You have time to think about and compare your options, so it is wise to take advantage of that. Taking your time to look over potential financing schemes in writing puts you at a much better advantage for negotiating a great deal and deciding which option is best for you — not just for your dealer.

Whether you decide that a dealer-provided financing option is in your best interest or prefer to go through a third party, the advantageous part of buying a vehicle is that the buyer does have choices and leverage for negotiating the best possible payment plan. Although purchasing a car may seem like an overwhelming prospect, knowing your terms and options is the best way to make sure you can finance a new vehicle without breaking the bank.

Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business. He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.


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Content on Moneycheck.com is provided for general informational purposes, and shouldn't be seen as an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed on this Site do not constitute investment advice and independent financial advice should be sought where appropriate. All our articles fact-checked by a relevant professional with expertise in that area of finance and we regularly update guides as necessary.

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