How much does it cost to finance a car?

‍

Car finance has become a hugely popular way of enjoying the benefits of car ownership without the upfront cost of buying one outright. There are several types of car finance agreements to choose from, the most popular being Personal Contract Purchase (PCP) and Hire Purchase (HP), which both effectively work by leasing you the car while you make monthly payments towards eventually owning it. We’ll look at these in more detail here, as well as explore the costs involved in financing a car.

Understanding the basics of car finance

There are a few different car finance options available, and the most common ones are:

• Personal Contract Purchase (PCP) – where you pay a deposit, monthly payments for two to four years and a ‘balloon payment’ at the end if you want to buy the car. You can also upgrade to a newer model and refinance, or hand the keys back.
• Hire Purchase (HP) – where you put down a deposit (usually 10% of the car’s value) and make monthly payments that cover the whole cost of the car (plus interest), which you own when you finish the repayment plan. This is also known as a Conditional Sale, and you don’t have the option to hand it back.
• Personal Contract Hire (PCH) – where you make monthly payments to lease the car, but don’t own it at the end of the contract.

Securing car finance involves applying for credit, and lenders have to be careful to ensure you can afford the monthly payments before agreeing to this. Your credit rating will affect your chances of being given car finance, as well as your debt-to-income ratio. Keep in mind that this process will involve a hard credit check, which will appear on your credit report and negatively impact your credit rating.

Key costs involved in financing a car

In addition to the running costs of a car – such as insurance, tax, servicing, breakdown cover, repairs and tyres – there are a few key costs to keep in mind when you go down the route of car finance. These include:

• The initial deposit: this is often at least 10% of the value of the car, but if you’re able to put down more, this will bring the cost of your monthly payments down.
• Monthly repayments: as mentioned, these will be influenced by the size of the deposit you put down, as well as by interest rates and how many years your loan term is.
• Final payment: sometimes called a ‘balloon payment’, this is a lump sum you pay at the end of a PCP agreement if you choose to buy the car rather than hand it back.

When thinking about how much to finance a car, it’s important to budget for the total costs over the life of the finance deal, as you may find it ends up costing more than other options, such as buying a car outright or taking out a car subscription.

The impact of interest rates on car finance 

Just like they do with a mortgage, interest rates impact the amount you pay on a car finance deal and will fluctuate in the same way. And just like with a mortgage, there are fixed and variable interest rates, so it’s important to know which you’re signing up for. 

A fixed interest rate stays the same for the duration of your car finance agreement, which makes it easier to budget for, but could mean you pay more interest than you should be paying if overall rates go down. Variable rates go up and down with the Bank of England base rate and other factors, and your monthly payments go up and down with them. It’s a win if interest rates go down and therefore so do your payments, but they could also go up, meaning you pay more.

Additional costs to consider when financing a car

There are a few other costs to factor in when taking out a car finance agreement. There may be arrangement and documentation fees to pay, and delivery fees if you’re having the car dropped off at your home. You’ll need to budget for running costs such as comprehensive insurance and ongoing maintenance and repairs, as these aren’t usually included in your finance agreement.

It’s also important to keep in mind that the car will depreciate over the term of your finance agreement, which will affect its resale value. This means that should you decide to sell it, you’re unlikely to get back what you paid for it – which means the car could end up costing you more than what you pay upfront and in monthly fees over the contract period. This is one of the key considerations when deciding whether or not to purchase a car or hand it back at the end of a PCP contract, but it’s especially important to keep this in mind for a Hire Purchase when you don’t have the option to hand it back.

Is financing a car the right option for you?

Putting a car on finance is a convenient option that bypasses the need for the large upfront investment required to buy a car outright. However, it’s also a big commitment throughout a typical two to four-year contract period. When interest and depreciation are factored in, the costs involved could end up being unviable for your financial circumstances. 

If you’re unsure whether or not car finance is right for your situation, you can feel free to get in touch with our finance experts for advice tailored to your circumstances. They’ll be happy to talk through the financing options available at Drive Fuze, and can also explain more about our all-inclusive car subscription service. This is a great alternative to car finance, as there’s only a low, refundable deposit payable upfront and you can cancel your subscription at any time. Perfect if you want the advantages of a car finance deal but with a lot more flexibility! Head to our support pages to find out more about car subscriptions and how they compare to car finance.