First time financing a car? Here’s everything you need to know

Whether you are buying new, or financing a used car, borrowing money lets you spread the cost of a vehicle over time, rather than paying the full amount upfront.

This guide will give you everything you need to about how car financing works and what you need to know before making your first application.

What is car finance and how does it work?

Car finance is a product that allows you to buy a vehicle by spreading the cost over time, rather than paying the full price upfront. This typically involves taking out a loan or entering into a finance agreement with a lender.

There are several types of car finance options available to suit different needs and budgets. The two most common car finance products are hire purchase (HP) and personal contract purchase (PCP):

• HP: With this option, you pay an initial deposit followed by fixed monthly payments over a set period. Once you've made all the payments, you own the car outright. This can be a great choice if you plan to keep the vehicle long term and prefer simplicity.
• PCP: This option usually involves lower monthly payments compared to HP. You pay a deposit and then make monthly payments for a set term. At the end of the term, you have the option to make a final payment (often called a 'balloon payment') to own the car, return the vehicle, or trade it in for a new one. However, it’s important to note that if you choose not to make the balloon payment, you will not own the car, and there may be mileage restrictions that apply.

To understand more about the differences between HP car finance and PCP you can read our guide, “Buying a car on finance: HP versus PCP”.

Ways to finance a car for the first time

When you’re thinking about getting your first car on finance, it’s important to look at all the options available to you. While HP and PCP are common choices, they’re not the only ways to get a car. Other finance options include:

Personal loans

You can take out a loan from a bank or lender to pay for the car. With a personal loan, you get the money upfront and pay it back in monthly instalments.

The benefit of this is that you own the car right away, and there are no limits or restrictions in place on how many miles you can drive in the car.

You repay the loan over a fixed period, which can range from one to seven years, depending on what you choose. Each month, you make regular payments that cover both the loan amount and interest. The interest is the cost of borrowing money and is added to your monthly payments.

Make sure to compare interest rates and terms across different lenders to ensure you’re getting the best deal. Consider whether you can afford the monthly repayments without putting a strain on your finances.

To learn more about the flexibility a personal loan and HP car finance can offer read our guide HP car finance versus personal loans.

Saving for a car

If you don’t need a car right away and this is your first time financing a car, saving up for one can be a smart choice. By setting aside a certain amount of money each month, you can build up enough funds to buy the car outright.

Here are some benefits of saving for your car:

1. No borrowing: When you save, you don’t need to take out a loan. This means you won’t have to deal with monthly payments or interest rates, which can add to the total cost of the car.
2. Full ownership: Once you buy the car, it’s yours completely. You won’t have any financial responsibilities tied to an agreement. This means you can enjoy your car for as long as you want, without worrying about asking permission to make any modifications or asking to sell the car if you want a change.
3. Financial freedom: Owning your car outright gives you peace of mind. You can focus on other expenses, or savings, without the stress of monthly car payments.
4. Better budgeting: Saving for a car encourages you to stick to a budget. It helps you understand how much you can afford and allows you to plan for future expenses.
5. Potential for better deals: When you have enough saved up, you may be able to negotiate better deals with sellers. Sellers often prefer cash buyers, which could lead to discounts or better prices.

While buying a vehicle outright can be appealing, there are important things to consider.

First, ensure there is no outstanding finance on the vehicle you’re interested in. It’s also essential to carry out proper checks, such as an HPI check, to avoid any unexpected surprises later on.

HPI stands for Hire Purchase Investigation, it is a check to get information on a car’s history (including maintenance and any crashes it has had), mileage and MOT status.

MOT stands for Ministry of Transport, and every car must have an MOT test to ensure it is fit and proper to drive on public roads.

Be aware that buying a car privately typically offers less protection than buying from a reputable dealership. Dealerships often provide warranties and after sales support, which may help get any minor mechanical issues fixed, without costing you money.

Personal contract hire

Personal contract hire leasing lets you drive a new car with lower monthly payments, but instead of owning it, you’re essentially renting it for a few years.

At the end of the lease term, you return the car. This option is great if you enjoy driving newer vehicles and want to avoid the hassle of selling it later.

Keep in mind that exceeding mileage limits or returning the car in poor condition could result in substantial additional charges. It's essential to factor these costs into your decision when considering whether PCH is the right option for you.

It’s important to think about your driving habits before applying for a personal contract hire agreement, as most providers won’t allow changes to the mileage limits once the agreement is in place.

On the other hand, HP offers more flexibility, since there are no mileage restrictions during the agreement. This makes HP a better choice for drivers who frequently have long commutes for work.

For more information on the benefits and considerations for personal contract hire, you can read our guide HP car finance verses personal contract hire.

What will I need for my first car finance application?

Before applying for car finance, it's important to understand how the process works and what information you may need to provide to the finance company. The following information is particularly helpful if this is your first time financing a car.

Below are some examples of what is typically required by most finance providers when you make an application for car finance:

Proof of identity

Whether this is your first time financing a car or your fiftieth, you will need to provide valid identification such as a passport or driver’s license, to a car finance lender. Make sure these documents are current and not expired. Some lenders may require a valid driving license before approving a new finance agreement.

Ensure all identification documents are up to date, as expired documents may lead to delays or rejection of your application.

Proof of address

Recent utility bills (like gas, electricity, or water) dated within the last three months may be required to verify your address, especially if you have recently moved.

If you are unable to provide utility bills, some lenders may accept other documents like tenancy agreements or phone bills. Be sure to check with the lender for acceptable forms of proof.

Proof of income

Most lenders will require proof of your income, or a declaration of your monthly earnings. You may need to provide payslips from your employer for the past two or more months.

Some lenders might also request your bank statements, or ask you to give consent for online open banking, so they can assess your income and expenses. This helps them ensure that the finance agreement will be affordable for you.

We encourage you to carefully assess whether the monthly payments are affordable for your long-term financial situation, considering other bills and unexpected expenses.

Credit history

Lenders will review your credit score as part of the application process. Having a good credit score and clean credit history is helpful, as it shows a lender you can manage your finances. It also shows that you have a history of making monthly repayments, on time, to your creditors.

If you're new to credit or have a lower score, it may help to take small steps to build your credit, such as regularly using and paying off a credit card. Over time, this can help you qualify for better finance options with lower interest rates.

What is a good credit score and what is a bad credit score?

Different credit agencies that use different scoring systems, typically though the higher the number, the better. Click through to their websites below to understand credit scoring, with an overview of scores they give:

• Experian typically give scores from 0-999, anything from 881 and above is considered good.
• TransUnion 721 or above is rated good or excellent, depending on the number.
• Equifax 670 or above is rated good, very good, or excellent, depending on the number.

What does APR mean?

APR, or annual percentage rate, is the total cost of borrowing over a year, including any interest and fees. The lower the APR, the less you'll end up paying overall. That’s why comparing APR's between different lenders can help you find the most affordable deal.

By comparing your options and understanding the terms, you’ll be in a better position to get the best deal on your car finance, and avoid paying more than you need to in the long run. Make sure you know exactly what you're signing up for before you commit.

Applying for car finance online

To begin your car finance application, below is the information you may need to provide to a lender for a complete credit check. It’s important to have all the correct information ready, as any inaccuracies could result in your application being declined.

• Personal information: Your full name, date of birth, and contact details, including your email address and mobile phone number.
• Employment details: Information about your employment status, employer, and monthly income.
• Address history: Your current and previous addresses for the last 3 years, as most lenders require at least 3 years of address history.
• Loan amount: The amount you wish to borrow for your new HP car finance.

Approved for car finance: What’s next?

After you submit your application, your finance provider will let you know if you have been approved. They will then reach out to guide you through the next steps of the application process. At this point, you may need to provide the documentation mentioned earlier (see: What will I need for my first car finance application?).

Before signing, carefully check the finance agreement for any early settlement fees or other hidden charges that could affect the total cost of your finance. Make sure all costs are clear and transparent before proceeding.

Once your finance application is fully approved and the provider has received any necessary documents, you can start choosing the car you wish to finance.

If you want to learn more about finding the right car, check out our guide, 'Choosing a car: everything you need to know before you buy.' This guide is especially helpful if it’s your first time applying for car finance or purchasing a car, as it offers tips on how to decide which car is right for you.

Understand your finance agreement

It’s important to understand the terms of your HP agreement. This includes the total amount you will pay, the interest rate, and any extra fees.

If you are considering paying off your car finance early or making any changes, check with your finance provider to see if there will be any additional charges.

Carefully read your agreement to fully understand all the requirements of your HP contract, before signing any documents.

Final steps

After the agreement is signed, the finance provider will pay the dealership, allowing you to take possession of your car. Ensure you receive all necessary paperwork and keep copies of all documentation. This will be useful if you ever need to request further information about your vehicle.

Tips for a smooth application process:

• Double check the information: Ensure all information is accurate and complete within your finance application.
• Stay informed: Take time to read through and understand the terms and conditions of your HP agreement.
• Ask questions: If anything is unclear, contact the finance provider for a better explanation.

I have been declined for car finance, what can I do?

Getting declined buy a lender can be disheartening, especially if this is your first time financing a car. But, it's worth trying to understand reasons why your application was declined. Once you know this, you can take steps to improve your chances of acceptance in the future. Read our guide what to do if you've been refused car finance?

Review your application

Take the time to review your application to ensure that no details have been accidentally entered incorrectly. If you find any errors in your information, contact the finance provider directly to explain the situation.

If you explain to the lender where information is incorrect it may help clarify why you may have been declined for car finance to begin with and could change the decision.

Consider alternative finance options

If you are looking to buy a car on finance and have not been accepted due to your credit profile, there are lenders who may be able to help. Look online for lenders who help customers with adverse credit.

If you are still unsuccessful in getting approved for car finance, you could always consider the option of buying privately if you are in a position to start saving for a car.

Revisit at a later date

Most finance providers typically recommend waiting at least 3 months before reapplying for finance after your initial application.

At AutoMoney Motor Finance, we always welcome applicants who want to reapply for car finance at a later date.

Taking sometime between applications can give you the opportunity to improve your credit score or address any issues that may have prevented your earlier acceptance.

Helping you finance your first car

If you think HP car finance is the best option for you, AutoMoney Motor Finance offers car finance on a wide range of vehicles nationwide.

To see if we can help you, call our friendly team on the free phone number above, or click through to apply for car finance with us.

Representative example

You could borrow £10,000 over 60 months with an initial payment of £490.66 (including £199 Admin Fee) followed by 58 monthly payments of £291.66 with a final payment of £490.66 (including optional £199 Option to Purchase Fee).

Total amount repayable will be £17,897.60.

29.3% APR, annual interest rate (fixed) 24.7%.

This example uses the representative APR. This is the rate at least 51% of customers are expected to get.

Lending is subject to status and additional affordability checks. Rates quoted are subject to change and will depend on lending amount and personal circumstances.

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