Types of car finance for young drivers
All the types of car finance for young drivers are here! HP, PCP, Personal loan, Guarantor loan explained! And Yes! There is a car finance option for most young adults including those with a provisional licence
Compare car finance options
Other than a house, a car is likely one of the biggest purchases you’ll make. With that in mind, it’s essential to make sure you can manage the cost. That’s where car finance comes in!
Not many people have the funds to buy a car outright and instead opt for car finance, meaning you can pay for your car in one monthly payment.
Before even looking for a finance deal, though, consider how much you can afford: add up your monthly outgoings and make sure you can afford a car payment!
If you’re confident you can, read on to find out everything you need to know about how car finance work for young drivers.
How does car finance work?
Car Finance’ is a fairly general term and can apply to various contract agreements. In general, though, it just means paying for a vehicle over time instead of paying for it all upfront!
Most of the time, people finance a car using a hire purchase (HP), a personal contract purchase (PCP), a personal loan, or they lease a car.
How much you actually pay per month depends on many factors – for a start, you’re obviously going to pay more for a Ferrari than you would for a Corsa!
Besides the car’s cost, your payment will depend on the length of time the agreement is for and what deal you’ve gone for, as each car finance type will have a different monthly fee.
What are the different types of car finance?
It’s crucial to be clear on what you want from a car finance deal – do you want to own the car eventually? You need a Hire Purchase. Or do you just want to drive something nice for three years? Go for a lease or a PCP! Here’s how all of them work:
Hire Purchase (HP)
You can probably already guess how Hire Purchase works. You’re, in essence, ‘hiring the car’ until you’ve made all of your monthly payments. When you have, it’s all yours!
HP is one of the most common car finance types for young drivers, and it’s considered a sensible approach. When you take out an HP agreement, you can opt to pay a deposit or trade a car to reduce your monthly payments.
Once you’ve made all payments, the finance agreement is officially over, and the car’s legal ownership will pass over to you!
What are the pros of hire purchase?
A Hire Purchase agreement is popular for a reason! Here are the benefits of choosing this car finance method:
- You can drive it as much as you want! No need to worry about penalties for going over your agreed mileage.
- A Hire Purchase is one of the most common car finance options for young drivers and is very quick to set-up.
- If you’ve paid half of what you owe back, you can opt for a Voluntary Termination (VT), which means you can hand the car back and stop the payments. You won’t have any ownership of the vehicle – but it’s good to know you’re not stuck if you encounter financial difficulties.
- Fixed payments, usually over 3-5 years, means that you predict your outgoings each month! Making it a lot easier to stick to a budget.
What are the cons of hire purchase?
However, a Hire Purchase might not be for everyone.
- Compared to a PCP and lease contract, the monthly payments of a hire purchase are far higher. That’s because you’re actually paying off the total value of the car!
- You’re essentially loaning money, and that’s secured against the car. If you don’t meet your monthly repayments, the vehicle could end up being repossessed.
- Failing to make the repayments can also severely damage your credit score: don’t sign up for it if you doubt keeping up the payments!
How does hire purchase work?
Here’s an example of how a Car Hire Purchase agreement might work for a young driver:
Emma just graduated and is finally earning a decent wage. She wants to buy herself a nice car, costing £10,000 through hire purchase. The agreement lasts for four years (48 months). She’s got a bit of saving and decides to put down £1000.
She’s offered an APR of 9.9%. She will pay £227.83 every month for four years, and she’ll then own the car! In total, she’ll pay around £1935.84 in interest.
What is a conditional sale?
A conditional sale (known as a CS) is pretty much the same as a Hire Purchase agreement! The only difference is that you will automatically own your car after payment of the total finance. Depending on your contract, a conditional sale might have a balloon payment at the end of your agreement.
What is a personal contract purchase (PCP)?
In recent years, a PCP car finance agreement has become very popular, particularly amongst young drivers!
The Personal Contract Purchase agreement isn’t too different from a hire purchase agreement. The way it works is quite similar: you’ll have the option of a deposit and then pay fixed monthly payments for your contract’s duration (usually 3-5 years).
The significant difference in the PCP deal is how you end your agreement. You have two options:
- You can either hand the car back – As you won’t own the car, you have mileage limitations. If you go over your mileage agreement, you’ll get a penalty charge. Similarly, you might have to pay for any damage caused to the car during your contract term.
- or you can pay what’s called a ‘balloon payment’, which will pay off the remainder of the car and will mean you own it. The balloon payment is paying off what’s called the Guaranteed Minimum Future Value (GMFV). Be warned, though, this is often several thousand pounds!
What are the pros of PCP?
While at first glance, a Hire Purchase might seem the better option, there’s a few huge advantages of a PCP deal:
- Your monthly payments are significantly lower, as there’s a large lump sum due at the agreement’s end.
- You have more flexibility: if you don’t want the hassle of owning a car and selling it, you can simply hand it back and take out another PCP!
- You have a fixed cost over time, so you can easily fit your motor expenses into your budget.
What are the cons of PCP?
Lower monthly payments might be all you need to hear, but make sure you understand the drawbacks:
- You have mileage limitations. If you change jobs soon and have to drive a longer journey, you could be in danger if you’re near your mileage limit!
- You’re paying interest on the GMFV: even if you decide not to bother paying the balloon payment.
- If you decide to keep the car, you’ll need to pay up a sizable chunk of change to pay off the final payment.
- If there’s any damage on the car not covered by your lenders’ fair wear and tear policy, you’ll have to pay for the repairs.
How does PCP work?
Personal Contract Purchase is a reasonably simple car finance agreement, but it’s a little more complex than the traditional Hire Purchase. Here’s an example to help you get your head around it:
- Tommy has just turned 18 and doesn’t make a lot of money. However, he needs a car to get to college. He signs up for a PCP deal, lasting four years (48 months) on a reliable car costing £12,000. He’s offered an interest rate of 9.9%.
- He decides that he needs a fair amount of miles on his contract, as he’s looking for a new part-time job and might need to travel. He opts for an annual mileage of 10,000.
- As Tommy doesn’t have a big wage, he’s only putting down a deposit of £500. At this point, the lender works out the GFMV: which will be his balloon payment.
- Tommy pays £154.45 a month for 48 months and has a final balloon payment price of
£8,008.93, and paying £3,922.53 in interest. He decides to hand the car back and take out a new PCP deal on a new model.
How does PCP work at the end of the contract?
With hire purchase, you have no choice but to take the car home with you. With a PCP, however, you’ve got a choice to make. You can either!
A) Hand the car back, and run away. If you’ve had enough of the car, and you’ve decided you’d instead buy your next car outright, you might want to walk away. You don’t have to pay any extra at the end of the PCP contract – assuming you have no penalties for going over your mileage or for any damage.
B) Hand the car back, and sign up again for a newer car. If you’ve really enjoyed the convenience and low monthly cost of a PCP deal, then you can opt to hand your current car back and immediately take out another PCP deal on a newer and shinier car.
C) You pay the balloon payment: you now officially own the car. If you’re in love with the car, you don’t have to say goodbye at the end of your agreement. Simply pay up for the balloon payment, and it’s all yours.
Can I end a PCP early?
The answer is Kind of. With every car finance agreement, you have a clause that gives you the legal right to end the contract as soon as you’ve paid off half of the total repayable amount.
Called voluntary termination covers your back if you run into financial trouble a few years into your car finance agreement.
However, with a PCP, it’s more complicated. You need to pay half of the total amount repayable: including the balloon payment, which can be huge. Meaning you probably won’t be halfway through the loan until very late in your contract: so think carefully about your financial situation before taking out a PCP!
What is a personal loan?
Ahh, the good old fashioned way of buying a car! A personal loan is simply borrowing a set amount of money from your bank over a certain period.
The Bank will put the money into your account. You then transfer this to the dealer to purchase a car. From this point, the vehicle is legally yours: but you still owe the money to the Bank.
As the loan is not secured to the car, you can sell the vehicle at any time. The Bank doesn’t care, as long as they get their money back!
What are the pros of taking out a personal loan?
A personal car loan is probably the simplest form of car finance. It has many pros:
- You can sell your car whenever you want! So if you change your mind or want to get something newer, you can sell it and use that money to pay off your loan (or at least, a good chunk of it).
- Fixed payments for the loan duration, so there are no surprises.
- With a personal loan, you can buy from whoever you want: whether that’s a well-known dealership or dodgy Dave from Gumtree. (psst…go for the former!)
What are the cons of taking out a personal loan?
However, personal loans aren’t as popular as they once were, and it has a few drawbacks:
- It’s a lot harder to get accepted for a personal loan than a PCP or an HP. If you have a poor credit history, it’s unlikely you’ll have a chance.
- Maximum loan values don’t usually exceed £25,000, so you’re out of luck if you have expensive taste. Shockingly, this won’t apply to the average young driver: unless things are going exceptionally well for you!
- With PCP and HP agreements, the lender typically carries out checks on dealerships to make sure they’re legit. With a personal loan, you’ve got a higher chance of buying a banger and being stuck with it.
How does a personal loan work?
Opting for the personal loan method of car finance is exceptionally simple. Here’s an example:
- Abdul wants to buy a used car, worth around £8,000. He goes to his Bank and gets acceptance for a personal loan, with an interest rate of 9.9%.
- He wants to borrow the total amount, so he takes out a loan of £8000 over 48 months. Abdul will pay £200.90 every month for four years and repay a total of £9643.12. He will pay £1643.12 in interest.
What is a guarantor loan?
If you have a poor credit score and set on a personal loan, all hope isn’t lost. If you have a trusted relative or friend with good financial standing, they can act as a guarantor for you. Beware, your guarantor will be liable for your monthly repayments if you fail to meet them.
What are the pros and cons of a guarantor loan?
A guarantor car loan offers all of the benefits of a personal loan and is especially useful if you have a rubbish credit rating. The drawback, of course, is that your guarantor (usually a relative) is accountable for you if you fail to make the payment. A surefire way to ruin a relationship, so you need to make your repayments!
How does Car Leasing work?
In essence, car leasing is simply long-term rental! Most of the time, you’ll lease a brand new car. Similar to other finance types, you’ll often have to put down a deposit, which can be as little as one month.
What are the pros of leasing a car?
If your mate who earns the same amount of cash as you suddenly turns up in an Audi, you can bet your bottom dollar that he’s leasing it! Here are the pros of leasing a car:
- It’s the cheapest way to drive a new car in terms of monthly payments. That’s because you’re not paying anything towards actually owning the vehicle.
- You don’t have to worry about the car’s depreciation, as you’ll be handing it back.
- Most leases are on new cars, so you’ll receive a manufacturer’s warranty and won’t need to worry about MOT (if your lease is three years or less).
What are the cons of leasing a car?
- Usually, you need to have an excellent credit rating to lease a car, more so than if you were taking out a PCP or HP.
- When you hand the car back, you will have the vehicle inspected for any damage that isn’t considered fair wear and tear. You’ll have to pay for any repairs.
- You have a set mileage limit, and you’ll face heavy fines if you drive over it.
- If you decide that you can no longer afford the car, it isn’t easy to get out of the contract. You’ll have to hand the vehicle back and pay a cancellation fee (usually a charge of at least 50% of the remaining total you owe).
No deposit car finance options
One of the main attractions of car financing is that it’s an affordable way to buy a car that you can’t pay for outright. However, that doesn’t quite work out when you don’t have a couple of thousand sitting around for a deposit!
Thankfully, no deposit car finance for young drivers is very common. As long as you meet the requirements (usually your income, credit score, and so on), then you can probably find a no deposit car finance deal. This means that you’ll pay more over the long-term, but it can be a good option if you don’t have the cash upfront and don’t want to wait.
When it comes to a deposit, you also don’t need to pay in cash! If you have an older car, you can trade the car in to the dealer, and this will take a chunk of your deposit (depending on the car’s value). This is called part-exchanging.
It’s actually quite convenient too, as you don’t need to worry about selling the car yourself. However, if you’re up for it, you might be able to get more money by selling to a third party and then putting that money towards your deposit.
Financing a car
In summary, there’s no perfect car financing option for everyone. It really depends on your circumstances:
- If you want to pay to own the car eventually, take out a Personal Loan or HP
If you’re not sure whether you want to keep the car, take out a PCP.
- If you don’t want to own the car or want to drive a brand new car, consider a car lease.
Whether you have a considerable income and an excellent credit history, or you’re looking at your first decent paying job, you’re bound to find a car financing deal for you. Just make sure you’ve got the budget for it, and go for it!
Can I get finance with a provisional licence?
I have a provisional licence. Can I get a car loan?
Many young drivers have a provisional driving licence wanting a car, making it difficult to obtain finance. Although some lenders allow people with a provisional to get car finance, many finance companies will not accept a provisional driving licence as they see it as a high risk.
There are a few basics to follow if you want a car loan before getting your full driving license.
- The car you choose must be a sensible first car with a maximum value of around £12,000.
- Paying a deposit of about 10% can help you get it you get approved in your name.
- However, you may need a parent to cosign the finance agreement with you.