Cash is often the most cost-effective way to buy a car. But this isn’t always possible, especially if you have money problems.
In 2018 more than 80% of new cars in Britain were bought on finance – but that doesn’t mean it’s going to be right for you!
The four ways to finance your car
- a personal loan – a loan from your bank or building society to spread the cost over 1 to 7 years. Here you own the car from the start;
- hire purchase (HP) – an initial deposit (often 10%) followed by fixed monthly payments over an agreed period. With HP you own the car at the end of the payments;
- personal contract purchase (PCP) – this is a form of HP – legally you are buying the car, not leasing it. But your monthly payments are much lower because at the end of the PCP contract you can hand back the car or make a large payment called the balloon payment or the Option to Purchase Fee. If the condition is poor or you have exceeded an agreed mileage you will have to pay extra at the end if you hand the car back;
- leasing – this is also called Personal Contract Hire (PCH). You give the car back at the end of the contract term. As with PCP, there are mileage limits and you will have to pay more if you exceed these.
It can be confusing to know which the right one is for your circumstances and the finance paperwork can be difficult to understand, as this Moneybox recording highlights. It’s always better to be prepared before you hit the forecourt and fall in love with a car.
Remember, your dealer will be after a sale, and doesn’t have your financial health in mind. In 2019 the regulator conducted a big mystery shopping exercise and found:
- in about 30% of cases, dealers didn’t explain important features of HP, PCP and leasing contracts;
- some dealers get more commission structures if they sign you up to a higher interest rate;
- not all dealers made proper checks that you can afford the monthly payments.
PCP and leasing may sound cheaper…
The monthly payments for PCP and leasing are lower than for HP or a loan because you are not paying for the whole cost of the car during the contract.
But this lower cost doesn’t mean PCP and leasing is better value in the long run. If you buy the car through a loan or HP and then keep it for a long period, this will usually work out much cheaper than changing your car every few years with PCP and leasing.
Every time you get a new car with PCP or leasing, you start paying for large amounts of depreciation. that is how they set the price of PCP and leasing. By owning a car for longer, you have years where the depreciation is much lower.
What do you want from your car and your car finance?
Here are some common customer profiles – do you fit in one?
Keep your cost down now and in the future
Ms Johnson wants to keep her family’s motoring costs down as low as possible for the next 5-10 years. She has a reasonable credit rating but no savings for a deposit.
Best option – she should look for a cheap bank loan and also go for a make/model which has got a good reputation for reliability. Going for a 5 year loan will keep the monthly charges low and fixed so she can budget for the long term. And she is actually buying the car, so won’t have to do this every few years. If she needs a bigger or a smaller car, it’s easy to sell the car and use the money from that to buy a new one.
Worst option – getting a PCP or a leasing deal on a newer, more expensive car so she is paying the high depreciation every time the deal ends and she has to get a new one.
Poor credit rating
Mr Smith has a poor credit rating after he failed on some credit card repayments. He’s now back in the black and needs a new car. But he’s worried about the impact his poor credit rating will have, and he doesn’t want to get in financial difficulty again.
Best option – Mr Smith should consider a hire purchase. he can choose how long the payments are made for, which gives him flexibility at the start, although the longer the term, the larger the amount of interest he will pay overall. After that the fixed interest rate means there shouldn’t be any nasty surprises.
Worst option – A personal loan from a bank or building society usually has high interest rates and is only available to those with good credit ratings. It can be difficult to get PCP and leasing with poor credit except at very expensive interest rates. Paying 40% interest can be killing.
Whatever option he goes for isn’t going to be cheap. So he needs to think about going for an older car and a reliable make.
Lots of mileage
Mrs Patel’s job as a child welfare officer means she has to do a lot of driving around. She needs an option that allows her to travel as much as she needs.
Best option – Going for a hire purchase or a personal loan means Mrs Patel doesn’t have to worry about the miles she clocks up.
Worst option – PCP and leasing have a mileage cap, which wouldn’t make them suitable for Mrs Patel.
A fluctuating income
Mr Nowak is a plumber and some months he takes home more money than others. He is looking for an option to help accommodate his income fluctuations.
Best option – Mr Nowak could look at PCP, which would mean low monthly payments and a balloon cost at the end, which he could save for in the good months. This won’t work well if he is too optimistic about what he will save.
Another good option would be to get a loan for a second-hand car from a reliable make where the monthly loan cost would be affordable even in less good months.
Worst option– If Mr Nowak is worried about his fluctuating salary, HP might not be a good idea, as the car could be repossessed if he misses an instalment. This is possible with PCP but less likely as the payments are lower.
Needs a car for a set period
Ms Campbell has moved up to Manchester for 2 years due to job relocation. She needs a car but is likely to move away after her contract is up. She may not want a car afterwards.
Best option – buy a second-hand car, with a loan if she needs it. This won’t depreciate much in value.
Other options – Both PCP and leasing give her the option to return the car at the end of the leasing. But 2-year contracts are not cheap as you pay for all the most expensive depreciation in the first two years. And getting a loan for a new(ish) car for only two years is not as cost effective as for longer-term purchases.
Whatever option you go for…
It’s always a good idea to decide what your budget is beforehand. This has to take into account the car finance and the running costs: insurance, servicing, petrol etc.
Be realistic about this and think about how your needs could change over that period. Might you change jobs so you have further to commute every day? If the repayments sound OK now, could you still afford them if you or your partner’s income drops? Here is a guide to finding the right car for your budget.
With any car purchase, ask yourself these questions before making a decision:
- What’s the full cost of the loan, including interest and any charges?
- Can I get a better deal from another dealer?
- Can I get money off?
Ask for all quotes in writing and take them away to compare them. Don’t be taken in by the salesman saying you need to make a snap decision, or some offer is finishing soon.
Were you sold something that was unaffordable?
The Financial Ombudsman says:
Despite the low upfront cost of arrangements like PCPs, we do hear from some people who are struggling to keep up with their repayments. As in other areas of credit, car finance providers aren’t always responding as positively as they should when they know someone’s in trouble.
But we’ve noticed too that some lenders aren’t being thorough enough with the affordability checks they’re carrying out right at the start. And if they’d taken more care at this stage, their customer might not have ended up in difficulty at all.
If you have a car on finance and the repayments aren’t affordable – you are getting into debt elsewhere because of the struggle to keep up with the car payments – you may be able to make an affordability complaint and take it to the Financial Ombudsman if it is rejected.
Buying a car privately?
If you are buying a car privately for cash, you don’t have as much legal protection, so you need to look out for problems.
It is very important that you don’t buy any car unless you see the V5C registration document and the seller is the registered keeper. Ask for some proof of identity, such as the seller’s driving licence which has a photo.
Check everything on the list here: What to look for when you’re buying a used car. If you buy a car which has been stolen or which is on finance, you are likely to lose the car and not get your money back.
Best to part exchange or VT a car?
Get a car finance commission refund?
How to end your car finance early
Claire Mulgrue says
We are in an IVA woth 17 months remaining. My husband has a company car but has been informed that this will be replaced with a car allowance. As we’re in the iva we are really stuck as we cannot get a lease or finance from anywhere. Are there any company’s who may lend to us? We have had this approved from our iva company.
Sara (Debt Camel) says
Car finance is an increasing problem for people in IVAs. I don’t know of any PCP or leasing finance that accepts people with poor credit ratings. You may need to look at HP on a second hand car.
Christopher Wood says
Hi Sarah
I am confused I have a personal debt with Volkswagen regarding a repossed car, they placed a charging order on my property to the value of the debt. they have recently gone to court to have my wages garnished for a monthly payment toward the debt. I am now aware that they can do this however I went to court as it was difficult for me to meet the amount that was being asked. However the judge advised that based on my income and expenditure, the amount I was claiming for my Daughters swimming would not be considered, he said that I should agree to the payment as if not the company could order the sale of my house to meet the debt.
However I have just read that a charging order for a debt that I owe can not be applied to a joint owned property, if this is so then how did Volkswagen manage to get a charging order against the joint property for a single debt
Sara (Debt Camel) says
Did you challenge the charging order in court before it became final? If you had, it should have been changed to a Restriction on your property rather than a Charge.
I suggest you talk to National Debtline about your options here. See https://debtcamel.co.uk/more-information/where-to-get-help/ for contact details/
JoB says
Hi I’m wondering if I should write to Black Horse. We had a car loan from them back in 2010 as it was the only company to give us finance due to poor credit. I’m wondering if this could also come under the unaffordable loans complaint? However I’ve also seen comments regarding black horse statements not being accurate and not advising customers that they can settle or something g along those lines. Can anyone shed any light on this.
Many thanks!
Sara (Debt Camel) says
I don’t think you have any chance of an affordability complaint about a single loan in 2010 succeeding.
I’m not sure what your points are about Black House statements – unless you have a clear reason to think you were charged the wrong amount, I doubt there is anything you can do, especially if the loan has been repaid.
Claire Mason says
Hi Sara,
I recently wrote to PSA Finance regarding car finance which I took out through Dixon Motor Holdings in 2002. They have responded to confirm that my loan had PPI applied and state that as the insurance policy was conducted by Dixons who are no longer trading and as the sale of my policy took place before 2005, the dealership was not acting as their representative. They have directed me to FSCS but it seems that they will not consider a claim as it was prior to 2005. Is there anywhere else I can go with this?
Kind regards,
Claire
Sara (Debt Camel) says
Hi Claire, if you ask on the MSE forum on PPI reclaiming someone may have come across this exact situation. Good luck!
Mohammed says
Hi
I have two defaults(57&67) satisfied which are due to come off in July & September 2018.
1x ccj £640 satisfied due to come off 30/1/2020
Had two accounts with Audi which are settled 2011 & 2015 no missed payments
Got HP on a car since 2015 due to finish March 1
2019 ( payments are on time ) no missed payment
Bank loan , payments are on time no missed payments
2 credit cards 0 balance and paid fully no missed payments
Took a retail finance for £300 with V12 August 2016 , approved by underwriting, paid off July 2017 . On August 2017 took another finance with them and approved instantly , will pay off by August 2018 .
When these accounts are fully paid and closed , will this lower my credit score !
Thinking of applying for a pcp with Audi around July 2019 , is there any possibilities they will accept me even though I have ccj that will have seven months left before it disappears! VW are not looking for people with poor score , will my score be fair / good if managing my credit account in responsible manner b4 the ccj drops !
Your answers are. much appreciated
Sara (Debt Camel) says
Completing the loans on time will not lower your credit score. The best thing to improve your credit score is to use each credit card every month for something small and repay it in full, on time, so there is no balance. See https://debtcamel.co.uk/credit-score-change/ for details. You don’t need to take out any extra loans to help your credit score.
But your credit score will never get to good with a CCJ showing. I can’t predict what Audi’s PCP criteria will be two years in the future, but it is more likely that the regulator will make the market tighter than easier to borrow.
Why not plan to just keep the car you have bought on HP for a few years more? A few Year with no car finance payments at all could let you save a good amount!
Jon mayo says
Hi.
We are in middle of mortgage application and just found a default on a van i leased that finished in july 17, it was returned a few months late and they put a default on it for £8500 until van is sold.
They have been sending correspondence to my old address not the new one i gave them.
Will i now be turned down for mortgage even if i pay off default in full and leave until April
Sara (Debt Camel) says
Were you aware that money was owing because you returned the van late? Has the van now been sold?
If you can show you gave them your new address then you have a case for having the default removed.
Otherwise the best you can do is repay any money owing. But it is quite possible that this will prevent you getting a mortgage in April, or indeed for at least a year, possibly several years. You can add a note to your credit record saying you were unaware of the default (see https://debtcamel.co.uk/notice-correction-credit-record/).
jon says
Hi Sara
I thought i had another 6 months lease on the van.
I did ring them to give them my new address.
The van is going to auction soon and i have agreed to pay any shortfall
Sara (Debt Camel) says
So when you returned the van they didn’t comment that the lease wasn’t up? Well you are going to have to ask them to remove the default on the grounds that if they had sent the information to your new address, you would have paid it.
Jim says
Hi, I have a Moneybarn debt from 2014 and in 2015 they repossessed my vehicle due to me being 3 months behind although they sent me a letter saying I have 6 months to pay it! I have had an arrangement since which ive paid £50pm. My nanna past away recently and my mum has received a lump sum in which she has offered to pay a partial settlement amount. However Moneybarn will not offer a reduced settlement offer and want £10,100 to clear the account. My mum will not pay this and will pay £6,000 max but they will not accept. With the recent news story about Moneybarn I am looking for guidance as to how to proceed. Thanks
Sara (Debt Camel) says
Well you can’t force a lender to accept a F&F – if they refuse, you just carry on paying the monthly amount.
But “they repossessed my vehicle due to me being 3 months behind although they sent me a letter saying I have 6 months to pay it” sound like it is worth a formal complaint to Moneybarn – ask them to remove the interest from the loan as compensation and send it to the Financial Ombudsman if they refuse. Also if you couldn’t afford the repayments, should they have been able to tell that from when you applied for car finance? If they should, this is an “affordability complaint” which they then made worse by their poor communication when you got into arrears.
Mohamed says
Hi I have car on pcp only one year left on it all my credit are up to date never missed a payment but however I have a ccj on an old credit but would this issue of the ccj will effect me now if I want to purchase new car ? Your advice & information very much appreciated
Sara (Debt Camel) says
Having a CCJ won’t affect you buying a new car, but if you want to get another PCP deal it will make that harder and MUCH more expensive. Best advice is to use the next year to save up as much money as possible so that you need to borrow as little as possible. Could you save up the final big payment at the end of your PCP so you could keep the current car?
Richard says
Apologies if this has been covered before but I can’t find the answer. I have an hp agreement for a car. Total repayable was about £14k including interest. I’m half way through and up to date and am looking to clear the debt early. Am I entitled to reduced settlement or rebate of interest for paying early at all, even partially ? I’ve checked my agreement and it’s a legit company but I can’t see or more likely understand that bit. Thanks in advance.
Sara (Debt Camel) says
Yes there should be a reduction for early settlement. Ask the finance company for a quote and if you don’t feel it is low enough ask them for a written explanation of how it was calculated.
Richard says
Great quick response. I’ll do that and update for advice for others. When they quoted me by phone it appeared there was no reduction but I’ll do this via e mail.
Stephanie says
Hi I got a car on HP with Moneybarn back in March 2015 I missed a payment date but paid within the same month. On the second occasion this occurred they would not accept payment and said they would make a move for repossession. So a year later I voluntarily allowed the vehicle to be repossessed. Moneybarn claimed the vehicle had damage to a wing so I asked for photos to be sent which I didn’t receive. I then arranged to pay £10 month which I have paid every month on time. The problem I have is my bill is £6k and paying at £10 a month isn’t making a dent. By the time the 5 years is up I will still owe a sizeable amount and do not want a charging order on my property. At the moment I am penniless and cannot pay more. What should I do?
Sara (Debt Camel) says
“On the second occasion, this occurred they would not accept payment and said they would make a move for repossession” Well from what you have said that sounds unhelpful. There are restrictions on a HP lender as to when they can repossess a car and when they have to get a court order.
“I asked for photos to be sent which I didn’t receive.” it is a pity you didn’t follow this up with a formal complaint at the time. Was your request for photos in writing?
“By the time the 5 years is up I will still owe a sizeable amount” do you mean the 5 more years it will be on your credit record for? That is largely irrelevant – if you don’t want a CCJ (and later a possible charging order) you need to keep paying them every month.
How much were you paying each month on this HP contract? Were the payments actually affordable for you, or were they causing you to get into debt elsewhere trying to maintain the Moneybarn payment? Did Moneybarn go through your income & expenditure before they gave you the finance? the reason I am asking is that you MAY have grounds to make an affordability complaint…
Stephanie says
Thanks for replying Sara.
I pay religiously every month and can just about pay the £10. My contractual payment was £188 and I worked full time. I suffered from depression at the time so started having time off work. In order to cope I reduced my hours to 30 a week so I now earn considerably less than I did when I got the car (Roughly £100 a week less). When I initially went to pick up the car the sales lady said it had just come from the bodyshop as the wing had been resprayed. I foolishly took the car regardless because I assumed I would be keeping it for the 5 year term and I couldn’t see any damage.
The car in total with fuel and insurance was costing me £280 a month. I was struggling to cope with work and the pressure of the debt crippled me so I felt it was better to give it back. I had accumulated roughly £600 because Moneybarn wouldn’t accept a payment from me even though I’d made a last ditch attempt to keep it so I put that money to getting an old banger for work.
I still only work 30 hours a week and can’t imagine myself working longer hours. I suffer from social anxiety although I am feeling better I put it down to the fact I can retreat to my home. Getting the car in the first place was a huge mistake I definitely got carried away and what makes it worse is the car id got from Moneybarn was only a couple of years newer than the trusty old banger I got for a few hundred quid and I still owe 6k on a car I don’t have.
Sally says
I have a case with the the FOS and the company have referred my case to a CRA while we await the outcome.
This has destroyed my credit rating and will prevent me changing my mortgage.
Is this standard?
Sara (Debt Camel) says
what is the FOS case, who is the lender?
Sally says
Hi Sara
The company is a lease car company – Arval.
The case relates to charges they believed were due upon return of the vehicle for damage. We disputed this and complained. We lodged an appeal with the FOS and they found in favour of Arval. We were offered the opportunity to have this reviewed, which we have done and this is now in process.
In their correspondence it stated that no action would be taken during this time. Additionally, we verbally confirmed this with Arval.
We have just applied to remortgage and been advised that there is a non-payment market against this that has been applied for the last three months. This is the first we have heard of this but they are refusing to remove it as they state that this is still a debt.
Any advice would be gratefully received!
Thanks
Sara (Debt Camel) says
So the case is to be reviewed by an ombudsman? If you win the case, any negative information on your credit record should be removed.
I suggest you go back to the ombudsman and say what has happened, explain the effect on you, and say that you are intending to pay the bill if you lose the case, so you hope that the negative information would be removed then, otherwise you will have been penalised for making a complaint.
the problem with your credit record should not prevent you getting a new mortgage fix with your current mortgage lender.
Sally says
Just an update. The ombudsman agreed to contact Arval and this led them to agree to remove this. We are waiting for this to happen but have it in writing. Fingers crossed. Thanks
Enigmatica88 says
Hello To Everyone And Hope My Storey Will Help You.Here Goe’s…..
Please try the Full And Final Settlement also a charity based organisation can help you ,just do not get stressed as I only know what youre going through and it worked for me.
This is my story….
OK Basically someone smashed my new car which was on finance and at the time could not drive as had my license taken off me.,Police were useless and let the driver off without insurance and a license and a debt of £19,877 was left to me.Couldnt afford a solicitor and suffered so much stress with the finance company and their awful tactics.Car was on PCP ,Defaulted me then CCJ.Was in limbo and constant letters from the finance’s solicitors too.
Tried IVA but was not a charity based organisation and they would have made £5000 profit so made a few payments and then didnt do anymore but still stressed me out.
So last year was looking at some options and came across full and final settlements.
I went to a charity based organisation as he was going to apply for bankruptcy but I ended up asking him to try the full and final settlement as a relative offered to borrow me £1500 and offer this to the company.He was unsure they would accept but they had to as mentioned that it would be better to take this amount then to go bankrupt and have nothing in return. It was a SUCCESS so please do it and lower amount..Good Luck…..
steve says
I have a low credit score, and I won’t bother applying for car finance as I will most likely be declined. On this note, what would be the average credit score that would see me be accepted for a loan for finance.
Thanks
Emma says
I bought a car on finance from a trader . The trader was paid for the car by the finance company and was debt was with them. I have had nothing but problems with this car since I bought it and when I took it for its first mot by myself it failed on emissions. No one would take responsibility for the repairs and I carried on making the payments. Over 4 yrs I have paid out over £7000 in finance still owing just over £3000. On top of that over I have had to spend over £3000 on repairs to the vehicle to keep it on the road and road worthy. Because of financial difficulty a couple of years ago because of a £1500 cost of repairs to the car, I fell behind with my payments on the vehicle. The debt was taken to court and a suspended repossion order was put in place based on me making regular payments. I’ve kept up the payment arrangements as agreed. It has become the norm for me now to just pay for any repairs that need doing to it as I have never been able to get anywhere with the company over it. Just some months back it cost me another£300 in repairs. The car has conked again with a possible repair bill facing another £1000. I’ve looked back at my repair Bill’s and the car is conking with one thing or another nearly every six months. I believe I have been sold a dodgy vehicle which just keeps costing me on top of the finance payments aswell. The original company/claimant that took me to court went bust and rebranded to a different company name who I carried on payments to. That company has now sold my court order debt to a debt collection company. Can this debt company claim the money off me as they are not the original claimant on the court order. I have decided I am not going to pay any more on this car, and are paying for no more repairs. Enough is enough. I want to claim my money back on this car and believe I have enough evidence by way of repair Bill’s and mot failures to prove it was not of fit state as described when I bought it. I have been scammed. What do I do and where do I start to try and recover my money.
Sara (Debt Camel) says
It is a great shame you didn’t reach this conclusion years ago.
Where you are now, you have two different problems.
1) a consumer problem about whether your car was of satisfactory quality when it was sold to you (taking into account its age and mileage) and whether it was fit for purpose. This is made complicated by the fact it was bought so long ago and by the fact that there was a trader and a finance company and the finance company may have gone bust, but may have gone through some other form of restructuring. On the plus side you have a lot of evidence of problems! I suggest your first step should be to contact the Citizens Advice consumer helpline: https://www.citizensadvice.org.uk/consumer/get-more-help/if-you-need-more-help-about-a-consumer-issue/.
2) your question about whether you still have to pay the debt collector. I suggest you phone national Debtline on 0808 808 4000 about this.
If you don’t feel you are getting anywhere, you could consider signing up to this https://www.which.co.uk/consumer-rights/advice/the-car-i-bought-has-a-problem-what-are-my-rights but I can’t say you will definitely get a good result.