Should I buy a car on finance?

Lesson Type
Last updated: 14 Nov 2019

Buying your first car is an exciting time, but it can also be confusing trying to compare all of the options. More and more of us are switching to finance deals to buy vehicles, and here we take a look at how buying a car on finance works, what the best options for new drivers are, and what to avoid when shopping for a ‘buy now, pay later’ deal.

Buying new

Buying a new car at retail price is a nice idea, but, for many, it’s just not realistic. As soon as you drive a new car off of the garage forecourt, its value starts to decline. In fact, it’s estimated that a Ford Focus will be worth 40% less than its original price once it’s been on the road for three years.

Most new cars suitable for young drivers will set you back around £15,000 to £20,000 once you’ve chosen the specification you want - and that's after the cost of driving lessons and insurance! Many drivers find that this price is only achievable through monthly payments.

Hire Purchase

Hire purchase plans are fast becoming one of the most popular options for car buyers. A car hire purchase agreement allows you to make set monthly payments to the finance provider. The APR will be set before you start the contract, so you’ll know exactly how much interest you’re paying.

You will usually have to pay a deposit, and the higher the deposit, the less you will have to pay back in monthly instalments. It’s important to remember that you will not own the car unless you pay the Option to Purchase fee at the end of your contract. If you do choose to pay this fee, ownership of the car will be passed from the finance company to you. Alternatively, you can choose not to pay the fee and to return the car to the dealer.

You will usually also have the option to settle your car finance agreement early. You can do this by paying the outstanding amount on your car finance plan plus the Option to Purchase fee. There may be a charge for ending your contract early, so it’s worth checking with the finance company first.

0% Finance

If you’re able to pay a large deposit, a 0% finance deal might be the perfect option for you. You’ll typically be asked to pay around 35-40% of the car’s price, leaving the remainder to be paid, interest-fee, in monthly instalments.

0% car finance deals might be tougher to find, and they may not be available on the car that you want, but they are a good option for those who are able to pay a larger sum upfront.

What happens if I miss a payment?

If you miss payments to your car finance company, they will be able to reclaim the car, as it does not officially belong to you. It’s important to keep on top of your monthly payments if you’re planning to buy a car on finance, and you can do this by setting up a direct debit.

Don’t get carried away

It’s easy to get tempted by ‘buy now, pay later’ deals, but remember that you will have to pay eventually! Don’t get so taken in with the car you want that you forget about interest rates, as you could end up struggling to meet your payments.

Make sure you read all of the terms and conditions before signing any contract and work out your budget before going to look at any cars.

Will my insurance and tax be included?

Most car finance deals do not include car insurance, so you will have to budget for this separately. Bear in mind that insurance premiums can be higher for young drivers in new vehicles, so make sure you do some research into prices before choosing a car on finance.

You can shop around for deals including insurance and tax, such as Peugeot’s Just Add Fuel scheme, but the interest rates will usually be higher and you will generally have a more limited choice of vehicles.

Image via Justin Capolongo.