Buying a Used Car on Finance – What’s it all About?

buying a used car on finance

In 2019 around 2.4million cars were bought on finance in the UK, according to the Finance and Leasing Association. The majority of this was for new cars, but the use of finance to buy a used-car is certainly growing.

So why is it that so many more people are buying cars on finance these days? And which method of financing a car is best?

Well, we’re taking a closer look at what it actually means to buy your car on finance. And what the most popular options for financing a car are. So let’s dive in.

What does it mean to buy a used car on finance?

Whilst there are a few different methods of doing it, generally speaking, to purchase a car on finance means making monthly payments for your vehicle rather than paying for it upfront. Think of it as roughly similar to opting to buy your mobile phone on a contract rather than outright.

Most car dealerships will have different schemes on offer, and the available options can vary quite a bit. So it’s important to find the one that’s right for you. And whichever you go for, be realistic about what level of monthly payments you can comfortably meet.

What are the options?

The most common financing options are typically a Personal Contract Purchase (PCP), a Hire Purchase (HP), Personal Contract Hire (PCH), or using personal bank loans.

So we’ll take a closer look at these three as the most popular finance models out there.

Personal Contract Purchase

A PCP usually involves paying an initial deposit followed by monthly payments for a contracted period; typically around 3 years. During this time, you do not own the vehicle. At the end of your contract, you have the option to return the car or pay an agreed upon lump sum (a balloon payment) to buy the car outright.

This particular method also means access to slightly higher-end car models than you might ordinarily be able to afford. And if you like to change your car regularly, it could be well suited to you.

Another benefit of the PCP is that opting to return the car after three or so years means avoiding being left with a vehicle that has depreciated in value. After three years, a brand new vehicle has typically depreciated to around half of its original value. But with a PCP, you can avoid that being your concern.

You do, however, need to be cautious of going over the agreed mileage limit. And keep in mind that as you don’t actually own the car, you will be liable for any excess damage when it’s returned.

Hire Purchase

A HP involves making monthly payments for an agreed-upon contracted period in which you are regarded as hiring the vehicle. Usually, you are asked to pay a deposit of around 10%, followed by monthly payments for the remaining balance, plus interest. And once all payments have been made, ownership of the car is then transferred to you.

One of the benefits is that you can adjust how much deposit you’re paying, and subsequently the amount of the monthly repayments, to best suit you and your finances.

It’s similar to a personal loan, but the loan is secured against the vehicle rather than any of your personal assets. Remember, it does mean that if you fail to meet any of the payments, then the car can be repossessed. However, you are entitled to return the car if meeting the monthly payments becomes an issue.

If you know you intend to keep the car at the end of the contract, then a Hire Purchase may well suit you better than a Personal Contract Purchase.

Personal Contract Hire

Similar to the previous two options, a PCH involves making regular monthly payments, but crucially with a PCH, you do not have the option to buy the car at the end of your contract.

This does mean that you don’t need to worry about the car depreciating in value, but if you do want to own the car at the end of your contract, then this is not the option for you.

A PCH usually lasts between 2 – 4 years, so for anyone wanting to change their car regularly and avoid the hassle of selling, this option is particularly suitable.

As this is essentially a longer-term hire, then like the PCP, you will be responsible for any damage to the car when it’s time to return it and do need to stay within the agreed-upon mileage limit.

Whichever financing model you opt for, take some time to really think about what kind of contract you are comfortable with and what you can afford without being stretched. Then, when you have solid figures in mind, visit a dealership you can trust with a solid reputation, and they will be able to talk through their options with you in greater detail.