Car finance - Car Loans

Perhaps the most obvious motor finance option is a car or vehicle loan. The key feature of this kind of finance is that it is a secured loan, where you use your new car, motorbike, or other vehicle as collateral. 

Car loans can be very convenient – most car dealers will have an arrangement with a finance company and can help you apply for finance. Dealers often make a high margin on their motor finance and may try hard to convince you to use their service. Be wary though – dealer finance can be very expensive, so you might not get the best rate for your car loan if you don’t shop around. Look online to make sure you know what other lenders are offering before you commit.

​One of the big advantages of opting for a secured car loan is that it can make it easier to get motor finance. Why? Because it’s lower risk for a lender: if for any reason you don’t pay back your loan, they have a way to recoup their losses. Using your car as security can also make car finance cheaper, since the lower the risk to the lender, the less you can expect to pay in interest. 

​What that means for you, though, is that if something goes wrong and you can’t keep up with your loan payments, the lender can ‘repossess’ your car and sell it at auction.  If it doesn’t fetch enough to cover everything you owe then you’ll have to keep paying off the rest of the loan, even though you no longer have the car. 

Although a car loan is less risky to the lender than an unsecured loan, it’s far from ‘risk-free’. If you default, they’ll have all the hassle and cost of finding, repossessing, storing, and selling your car or bike - and if selling it at auction doesn’t cover everything you owe them, they’ll still have to try and get back the rest of their money. 

That’s why security isn’t the only thing they’ll think about when assessing your motor finance application. The most important thing they’ll need to know is whether you can realistically afford to repay the money you owe, plus interest. More on that later. 

By the way, it’s worth knowing that most lenders treat loans for new and used cars differently. 

• If you’re buying a brand-new car (or sometimes cars up to three years old) you can apply for a new car loan – usually with a term of three to five years. These can be quick and easy to access, as the lender will easily be able to assess the value of the car. The amount you can borrow will be directly linked to the price of the car (including ‘on-road costs’ such as registration). 
• Used or second-hand car loans are very similar, but they’re generally only available for cars that are up to six years old. (The lender probably won’t regard anything older than that as reasonable security, so you’ll have to get unsecured finance instead). For a second-hand car loan, the lender may want to do their own valuation before deciding how much they will lend to you, which can slow up the process. 

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A note on structuring your car loan 

There are lots of different ways you can structure a car loan – including the type of interest rate, the term (length) of the loan, and how often you make repayments. 

Fixed-rate interest loans are great if you want to know exactly how much you’ll be paying, and for how long. You won’t get any benefit if interest rates go down, but you also won’t end up paying more if they go up. But if you’re hoping to pay off your loan more quickly or think you might sell the car before you’ve repaid the loan, you may get more flexibility from a variable rate loan. 

When it comes to your repayment schedule, the lender may let you choose between equal monthly instalments or smaller monthly payments with a large ‘balloon’ payment at the end of your contract. This could be handy if you want more affordable repayments – especially if you’re planning to sell the car at the end to cover the balloon payment. BUT – if you don’t sell the car, or it doesn’t fetch enough, then you’ll have to find the funds for that large last payment. And paying less each month means that you’re not paying off the loan as fast, so you’ll pay more interest in total.

This really depends on what kind of motor finance you opt for.

• If you want to borrow against your house by adding your car finance to your mortgage, you’ll need to speak directly with your mortgage lender.
• For hire purchase or lease contracts, your car dealer will probably have a finance company you could work with – but be careful to shop around to make sure you get the best rates and terms and conditions that work for you. An online search for hire purchase or lease companies will show you there are lots of options.
• The same applies to a car loan – you could take the easy route and apply through the car dealer’s finance company, but it’s a very good idea to look around first and make sure you’re getting a good deal. There are scores of car finance providers online, and you may well be able to find a better rate or more flexible terms if you take the time to check and compare.
• You’ll find even more options if you’re looking for a personal loan. Most high-street banks offer personal loans so you could start with them, but there are many, many more online lenders who will usually assess applications much more quickly than a bank.

If you’re feeling overwhelmed by all the choices, you can make your search for car finance easier by using an online comparison site. These will show you a wide range of loan offers from different lenders and make it easy to compare the cost. But it’s still important that you read the terms and conditions of the different loans carefully. because these can vary widely and could include ‘hidden’ fees and restrictions.

Another option, if research isn’t for you, is to approach a broker. Brokers do all the leg work for you – finding and comparing options and explaining the terms and conditions so you don’t get caught unawares. They’ll even help you with the application (although the application process for most online loans is quick and straightforward so you may not need help).

You won’t usually have to pay for the services of a broker – they take their commission from the lender. But using a ‘middleman’ can slow the process down, and you need to make sure you’re working with a reputable, independent broker who is working to find the best option for you.

This is the burning question – and unfortunately, there’s no straight answer. It depends on so many things, including:

• How much you want to borrow
• How long for
• How good your credit rating is
• Whether you opt for fixed or variable interest
• Your repayment schedule
• How carefully you shop around. 

It’s easy to fall into the trap of comparing interest rates and assuming that’s the full cost of the loan. 

Interest rates are shown as a percentage – so the higher the interest rate, the more expensive the loan is. But there’s a lot more to it than that. The speed at which you repay your loan is just as important as the interest rate since interest is calculated regularly (for example every month or every week) on the amount you still owe (the ‘loan balance’). The quicker you can reduce the balance, the less interest you’ll pay. 

That’s why longer-term loans and lower repayments can look appealing and affordable – but actually end up costing you much more in the end. Adding your car finance to your mortgage may net you a much lower interest rate, but over the 20 - 30 years that you’ll be paying it back, your cost is likely to be far higher than if you’d paid higher interest on a short-term personal loan. 

If you opt for a loan with the flexibility to make extra payments, you could save yourself quite a bit by making some bigger payments early on, to reduce the loan balance and the amount of interest you’re paying.

Another thing to be aware of is that interest rates can go up and down. So depending on the type of loan you have, you might end up paying a very different rate down the track. Fixed-rate interest allows you to cut out the risk and have certainty over how much you’ll need to pay each month, but it does mean you are stuck with that rate even if general interest rates go down.

If you don’t want to use your new car as security for your loan – or if you’re buying a second-hand car that’s more than six years old, you could opt for a personal loan instead to finance your new motor.

If you own a property and have built up some equity, you might be able to fund your car purchase by redrawing on your mortgage.

Hire purchase is very different from a car loan or personal loan. With this type of motor finance, YOU are not actually buying the car, and you won’t own it until the end of the contract.

It’s basically a rental agreement – like with hire purchase, the finance company will buy the car for you and then lease it to you in exchange for regular payments over an agreed period.