Used car finance is big business. According to the Finance and Leasing Association the used car retail sector was 10% larger in 2021 than it was in 2020.
Why is used car finance so popular? Well, for a start, there’s the global chip shortage. The subsequent long waiting lists are forcing people into used cars.
Then there’s the sheer convenience. If you’re after a used car on finance you can walk into a dealership and drive out of it in a used car the same day.
The internet has also embraced used car financing. Find a car you like, apply for finance and it’ll be delivered to your door within a week.
There are, of course, a few catches. Keep reading to find out more.
>> Or skip to the section showing the best options on buying with used car finance
High APR on used car finance
It’s important to remember that finance costs on used cars vary far more than the cash prices. This means that if you shortlist used cars based on their cash prices you could unwittingly end up spending far more on finance costs than you need to, because a car with a higher cash price could end up costing much less per month (with the same contract terms).
Blame interest charges for this difference. Used car finance is convenient, but it’s saddled with very high interest rates. How high? New car schemes will allow people with good to excellent credit scores to go for 0% APR deals. Whereas even those blessed with such a credit rating can be charged as much as 14% APR on used car finance.
Dealers offering used car finance deals typically charge anywhere from 5% to 20%. When considering a used car, an APR difference of 5% might sound insignificant in the big scheme of things, but it adds up.
For instance: look at the difference in total price in these typical PCP (Personal Contract Purchase) agreements.
£9,995 used Fiat 500 – 8.9% APR PCP deal
Cash price – £9,995
Annual mileage – 8,000
Contract length – 48 months
Deposit – £1,000
APR – 8.9%
Monthly cost: £165
Optional final payment: £3,724
Total cost to buy car: £12,644
£9,995 used Fiat 500 – 13.9% APR PCP deal
Cash price – £9,995
Annual mileage – 8,000
Contract length – 48 months
Deposit – £1,000
APR – 13.9%
Monthly cost: £191
Optional final payment: £3,613
Total cost to buy car: £13,781
On this deal, an additional APR of 5% sees customers pay an additional £1,137 to own the car.
The APR charged is broadly down to your credit rating. Customers with excellent credit ratings typically get offered low APR deals, while those with poor credit ratings get offered high APR ones.
>> How to get car finance if you have a poor credit score
>> Car leasing with bad credit
The best way to finance a used car
PCP/HP
If you’re after the absolute best deal, it’s important to push for the best cash price as well as haggling on the finance terms, since both affect how much you pay every month.
The lower the cash price, the less – in theory – you should pay per month. But a low cash price is no good if you’re paying inflated interest charges.
Once you’ve haggled on the cash price it’s worth pushing for the lowest APR charge possible. With new car finance the interest rate is normally fixed (depending on your credit rating), but with used car finance, you should be able to persuade the dealer to lower the APR.
For instance: in the past we spoke to a BMW dealer that slashed its 12.4% APR offer to 5.9% when we suggested that the monthly payments were over our theoretical budget.
It’s worth asking whether any deposit contribution finance discount is available, as this can dramatically cut the monthly payments.
Opting for a car that’s in stock can also help you get a better deal, as it could mean a quicker, easier transaction for the dealer.
Personal loan
Personal loans tend to offer lower APR rates than used car finance schemes. Assuming you have a good credit rating, we’ve seen banks offering rates as low as 3% for buying a used car.
With a bank loan you’re buying the car outright, which means it’s legally yours. This means you can modify it as you see fit, rather than have to get permission from a finance company.
A bank loan essentially works like a Hire Purchase (HP) deal, rather than Personal Contract Purchase (PCP). This means there’s no choice about whether you want to buy the car outright – you’re fully committed to owning the car.
Cash
Another way of negating APR completely is paying in cash and simply buying a much cheaper car. For instance, if you have a poor credit score, and are finding it difficult to find a reasonable APR, you might want to take the money you’d put on a deposit of a used car, and simply buy an older car with that.
This is especially helpful if you’re thinking short-term. Instead of putting down £1,000 on a £10,000 car with a 12.5% APR, there is a lot of sense in simply buying a car for £1,000.
>> Used cars for sale – £1,000 or less
Further reading
>> Excess mileage charges and how they cost you dearly
>> What happens at the end of a PCP finance deal?
>> Best cars for £100 per month
>> Best cars for £150 per month
>> Best cars for £200 per month
>> Best cars for £300 per month
>> Best cars for £400 per month
>> Best cars for £500 per month
>> Top finance offers and cash deals
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