Getting a car on finance - is it worth it?

Not all car finance schemes work for every driver
Make sure a deal suits your needs before signing up
Ensure you look after the car if you plan to return it

Written by Murray Scullion Updated: 26 January 2021

The idea of driving a brand new car for a relatively affordable monthly payment is seductive. But is getting a car on finance a good idea?

No matter how enticing the deal, you should think about how it might affect you in the future rather than just diving in.

Signing up for the wrong type of finance agreement is the usual culprit of finance related maladies. Choosing a contract that doesn’t suit your circumstances ranges from inconvenient to disastrous.

Keep reading to learn about the different types of finance.

> Or skip to ‘six important questions to ask yourself before taking out a car finance.’

Personal Contract Purchase (PCP) allows you to spread the cost of a car across a deposit and a series of monthly payments. If you want to buy the car outright, you can also stump up for the optional final payment.

Hire Purchase (HP) splits the cost of the car across a deposit and a set of monthly payments. Once you’ve paid the last instalment, you own the car.

Leasing (PCH, Personal Contract Hire) works much like renting. Put down a deposit (known as an initial rental), pay a series of monthly payments, then when your contract is up, you simply return the vehicle and start again.

Below we highlight six important things to ask yourself before taking out car finance.

> Getting a car on halal car finance

1) Can I afford the monthly instalments?

Nearly all car finance plans rely on you making set monthly payments. Should you hit a sticky patch, it’s often possible to renegotiate the terms to shrink these payments and ensure you don’t fall behind.

However, you’ll want to be certain that your income is steady enough to meet the monthly cost before you sign on the dotted line.

If you miss any payments you can expect to be stung with late payment charges and additional fees that could quickly see your debt spiralling, potentially causing real damage to your credit score. This could prevent you from accessing the best-value mortgages and cheapest loans in future – or mean that banks won’t lend to you at all – so think carefully.

Remember, you also need to pay a balloon payment if you want to buy the car outright with a PCP deal.

>> The best new cars for less than £200 per month

2) Is my credit history good enough?

Your credit rating can drastically affect the amount you pay for car finance. If you have a very poor rating it’s certain that you won’t have access to the top deals and you’re likely to be faced with a more expensive and higher interest rates.

Furthermore, if you’ve had trouble meeting monthly payments for other services in the past, are you sure that you’ll be able to meet the payments for a new car on top of all your current costs?

If not, it’s probably not worth the stress of struggling to make payments each and every month.

If you don’t have a good or excellent credit rating, it’s worth taking some time to build your credit score before opting for car finance. If you need a car in the meantime, consider buying an affordable used car to tide you over.

>> Getting a car on finance with bad credit

3) Do I need a new car?

With some new cars available from little more than the price of a mobile phone each month, it’s very easy to think that all finance deals must be good value. However, nine times out of 10 you’ll have to pay a deposit and even if you don’t, the total cost can rack up quickly.

So it’s worth mulling over whether you need a new car – and if so, how much are you prepared to pay for it?

Both new and used models could be a good option for different drivers, but if you’re considering a finance scheme, it’s wise to work out exactly how much you’d have to pay in total – should you hand the car back at the end of the contract or make the optional final payment to buy it.

If you value driving a new car and can justify the extra cost, go for it. However, if this seems like a pricey luxury to you, fear not, as there are numerous affordable used car options that could be better value for your needs.

>> Used car finance explained

4) Do I use a car often enough to warrant buying one?

In many cities car use is falling as the hassle involved in finding somewhere to park, let alone the costs of running a car, is putting many drivers off.

If you live somewhere urban with decent short-term car hire options, it’s worth considering whether you use your car enough to justify committing to a car finance deal over several years.

If you only use your car one weekend every fortnight, signing up for a car sharing scheme rather than paying for a finance plan could drastically cut your car bills – and you wouldn’t have to worry about insurance, car tax or servicing.

5) Do I have a history of damaging cars?

We all pick up the occasional scratch when driving, but if every car you’ve driven has quickly acquired dozens of bumps and scrapes, think carefully before opting for a manufacturer finance deal. This is because Personal Contract Purchase (PCP) and Personal Contract hire (PCH) offers are worked out by calculating how much the car is likely to be worth when you hand it back – assuming the car is still in good condition.

Return a lightly battered car and you’re likely to have to pay additional fees as this damage will reduce the amount the finance company is likely to recoup when it comes to sell it. If you’re considering a PCP deal and are certain that you want to buy the car at the end of the contract, this doesn’t apply, however.

>> How to avoid damage charges

6) Am I sure this set-up is right for me?

If you want to own your car from the start or plan to modify it, other funding options could suit you better, as you’ll need permission from the finance company to change your car from the manufacturer’s specification – as until you’ve made all the payments, the car doesn’t belong to you.

In this case, opting for a loan or buying a car with whatever cash you can raise could be a wiser choice.

If, however, you’ve got your heart set on a new car, you know exactly how much you’ll have to pay – whether you return the car or buy it when the scheme ends – and you’re confident that the deal works for your needs, you could be amazed how much car you could get for your money.

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