Buying your first car can feel overwhelming. Most of the time, you want the cheapest car to insure for new drivers because of the high cost of insurance when you’re young, but there is also the temptation to get something newer on finance. New cars are often more reliable, but secondhand vehicles you pay cash for tend to be a lot cheaper.
Then you have the whole issue of how exhausting and complex car finance can be. It helps you spread out the cost, sure, but there are also long and complicated contracts and you have a bulk payment to make at the end of it all. So, how does car finance work, and is it a good idea for your first car? Let’s do this together.
What is Car Finance?
Car finance is when you spread out the cost of your car by making monthly payments instead of one bulk payment. It’s great when you don’t have much disposable income, and since they last between two and five years, you have plenty of options to find something more affordable. When it ends, you can either give it back and get a new one or pay the remaining balance.
If you choose the latter option, you get to keep the car, and it becomes yours. That means you have no contractual rules left to follow and no monthly payments to make. However, the bulk payment at the end can be quite hefty, so it’s good to have the option to trade your old car in for a new one and a different agreement.
What are the Different Types of Car Finance?
There are two main types of car finance available, and one final option that can be used if you’re struggling to find an agreement that suits you.
Personal Contract Purchase (PCP)
When you choose PCP financing, you get a car under a contract for 2-5 years. You make monthly payments, and at the end of the contract, you can either give the car back and get a new car or pay the remaining balance (called the balloon payment or Guaranteed Future Value) so that you can keep the car. The amount you pay at the end is determined when you sign the agreement, so you have time to prepare.
Key features:
- Lower monthly payments than hire purchase
- Mileage restrictions apply
- You don’t own the car until the final payment is made
- Around 80% of PCP customers return their car rather than buy it
Hire Purchase (HP)
Much like a PCP contract, this is a form of finance agreement. This means you don’t own the car during the agreement period. However, you pay more each month with hire purchase because, unlike PCP, you will fully own the car at the end of the agreement as it will be paid off. If you know you want to keep your chosen car, this is your best bet.
Key features:
- Pay off the full cost of the car in monthly instalments
- Higher monthly payments than PCP
- No large balloon payment at the end
- Usually includes a small transfer fee (£100-£500) at completion
Loans and Credit Cards
If you’re struggling to get an agreement approved or you just want to buy your car outright, you can get bank loans or use credit cards. This allows you to pay it off slowly over time without being stuck in a contract for your chosen vehicle. However, it is also a very easy way to get into bad debt and should only be considered if you know you can afford it.
Is Car Finance the Right Choice for You?
If you’re struggling to decide if car finance is going to be the right option, there are a few things you should take into consideration:
- Can you afford the monthly payments?
- Is your credit score good enough to be approved?
- Will your financial situation change in the near future?
- Are you going to be happy with your chosen car for 2-5 years?
- Can you afford the insurance and maintenance?
It’s important to take everything into consideration before you make such a big financial commitment, especially when you factor in other vehicle costs, such as insurance and upkeep.
Should You Get Your First Car on Finance?
If you can afford it and you know you’re going to be comfortable financially, getting your first car on finance can be a great option. It allows you the freedom to get yourself a newer car (which is arguably more reliable) without the stress of having to fork out a massive amount of cash just to get on the road.
However, remember that you’ll still need to factor in insurance costs, which can be particularly high for young drivers. For guidance on managing these costs, see our article on why young drivers face car insurance rises.
