An Explanation of Car Financing Options & Procedures in the UK

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As a millennial living in the UK, you always must have dreamt of buying your dream car once you become financially independent. People think that it is a cakewalk to buy your dream car in the UK if you have the required money in your hand. However, there are lots of parameters that should be contemplated beforehand to avoid any surprises later. 

Getting car loans in the UK from a direct lender is pretty easy even when you have a bad credit score. But, here also getting a loan on the same day is easy, but as a borrower, you should carefully read and understand all the terms and conditions involved in the process of car financing. 

Keep An Eye on the Car Financing Plans 

This is advisable by many financial consultants all over the world to comprehend the clauses involved in any loan. Otherwise, you might have to crib for being negligent once you start repaying the loan after the moratorium period ends. 

  • Whether the interest rates on the car loan attracts simple interest or compound interest, 
  • what is the moratorium period, if applicable, 
  • what are the processing charges and application fees, 
  • are there any foreclosure charges, 
  • is there an option of one-time settlement, 
  • any rebate in interest rate etc. 

These are some of the questions you should ideally ask the lender. 

Personal Savings Might Be an Option 

You can use your personal savings to buy a car and not go for a loan is the best option as you don’t have to pay additional interest on the loan amount and also there will not be any liability on you. 

Try if your savings can cover the amount of the car which is also beneficial at the time of selling when you own it, and not the bank which is the case when you take a loan. Thus, this is the best way to buy a car, if you have fewer savings then go for a car that suits your budget or wait for your savings to grow or car prices to go down with some discount offer.

Lending Options are also there

The other option to buy the car of your choice with little or no savings is to apply for a loan with a commercial bank or a direct lender. 

If you are approaching a bank for a car loan then make sure to have a decent credit score, else your loan application will get rejected which will further exacerbate your credit profile. If you have a bad credit score and even then your loan application is accepted by the bank then also you will be asked to pay increased interest rate or the loan amount sanctioned will be reduced due to credit risk.  

Opportunity for bad credit people too

Car loans to bad credit borrowers is usually a complicated process when it comes to commercial banks. However, with direct lenders, it is relatively straightforward to get the loan without much of a problem. But, the thing to watch out here is the interest rates charged by these direct lenders which are significantly higher than what a commercial bank would charge. 

The interest rates charged by these lenders fall somewhere in the range of 30-70% per annum depending on your profile, the loan amount and its tenor. However, some advantages are that the repayment terms and conditions, loan tenor can be negotiated by sitting with the lender. Also, these direct lenders transfer the loan amount to your bank account on the same day it is applied for, once it gets approved. 

The advantage of going for a car loan is that you don’t have to make a significant investment upfront out of your savings. Instead, you can distribute the cost of buying a car over some time with the bank paying upfront on your behalf. The disadvantage is you will need to pay extra in the form of interest payments over and above the amount you borrowed for the car. 

What about Hire Purchase?

Hire purchase is another alternate to financing in which you only need to pay an amount which is usually 10-15% of the total purchase amount. The Remaining 85-90% is paid in a phased manner in the form of monthly payments. However, in this mode of financing, the car is hypothecated to the lender/broker/car dealer until you pay the complete amount. 

You will indeed have the possession of the car, but the ownership will be with the broker unless the full loan amount is repaid. The downside of this method is, if you fail to make certain monthly payments, then the owner has the right to take possession of the car from you. 

If nothing, then PCP is for you

Personal Contract Purchase (PCP) is another innovative financing method. It is where you can use the car till the contract is alive and post which you can either return the car, pay for the resale value and continue having its possession or buy a new car by selling this one. 

One important aspect here is of trust between both the parties and thus the car’s buyer has first to pass it to enter a PCP deal. You might be asked to make a percentage of payment initially and then instalments until the contract expires. 

If you want the car after this expiry, then pay the balloon amount and get its ownership transferred to your name. Else you can choose to release the car and stop making further payments as monthly instalments.


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