Before you sit down with a dealer or a finance comparison site, there are six questions worth getting clear on. The answers will not always stop you from taking out finance, but they will help you understand what you are actually agreeing to.
What changed?
Car finance has become a common way to fund a vehicle purchase in the UK. The three most widely used arrangements are personal contract purchase (PCP), hire purchase (HP), and an unsecured personal loan. Each works differently, and the differences can matter more than the headline monthly payment suggests.
The FCA has been reviewing how car finance is sold in the UK, including whether consumers received fair treatment from commission arrangements. At the time of writing, that review is ongoing and its conclusions may affect how lenders and dealers present finance options in future.
Why does this matter for borrowers?
Monthly payments are easy to compare. The rest of the deal is harder to read.
A low monthly payment can sit alongside a high total cost, a tight mileage cap, or a large final payment that comes as a surprise. Knowing the right questions to ask before you sign can help you avoid those surprises.
Who may be affected?
Anyone considering car finance, whether new or used, whether through a dealership or directly with a lender, can benefit from asking these questions. First-time car buyers and anyone who has not taken out vehicle finance before may find them especially useful.
What questions are worth asking?
1. What is the absolute total you will pay?
The monthly payment is not the cost. Add up every payment you will make over the full term, including any deposit and any final payment (sometimes called a balloon payment on a PCP deal). That total figure is what the car is costing you to finance.
For example, 48 monthly payments of £250 plus a £3,000 final payment plus a £1,000 deposit comes to £16,000 in total payments. Comparing that figure across deals gives you a clearer picture than comparing the £250 alone.
The annual percentage rate (APR) also matters when comparing deals. A lower monthly payment spread over a longer term can mean a higher total cost overall.
2. What is the mileage limit, and what happens if you exceed it?
PCP and HP deals often come with annual mileage limits. If you drive more miles than the limit allows, the finance company will charge a fee for each extra mile at the end of the agreement.
Before signing, work out how many miles you typically drive each year and compare that with the limit in the contract. It is worth building in a reasonable buffer rather than choosing the lowest mileage tier to keep monthly payments down.
3. On a PCP deal, what are your options at the end of the term?
A PCP agreement usually gives you three choices at the end: hand the car back, use any equity to put towards a new deal, or pay the optional final payment to own the car outright.
The important bit is that the optional final payment is set at the start of the agreement, based on an estimate of what the car will be worth at the end of the term. If the car is worth less than that figure when the term ends, it may not make financial sense to pay it. If the car is worth more, you may have some equity to use. Neither outcome can be known for certain at the point of signing.
4. What happens if the car is written off or stolen?
If a car is written off in an accident or is stolen while it is on finance, your insurer will pay out the car's current market value. That figure can be lower than the amount you still owe on the finance agreement.
This gap between the insurance payout and the outstanding finance balance is the situation that "gap insurance" products are designed to address. Gap insurance is an optional add-on, not a requirement. Whether it is worth considering depends on the size of your finance balance relative to the car's likely depreciation.
5. What insurance group is the car in?
Car insurance costs vary with the insurance group of the vehicle. A car in a higher insurance group will generally cost more to insure.
Before committing to a finance deal, it can help to get an indicative insurance quote for the specific car. A monthly finance payment that looks affordable may look different once insurance is added in.
6. New or used: does it change what to watch for?
New cars typically depreciate quickly in the first year. That can affect the gap between the car's market value and the finance balance, particularly in the early part of a PCP or HP agreement.
Used cars may carry a shorter warranty period or no manufacturer warranty at all. Checking what cover remains is a reasonable step before signing.
The finance options available on used cars are broadly the same as for new ones, though the specific rates and terms on offer will differ.
What might be worth checking before you decide?
- Compare the total amount repayable across different deals, not just the monthly payment.
- Check the contract for the mileage limit and any excess mileage charge.
- Ask for the optional final payment figure in writing if you are considering a PCP deal.
- Get an insurance quote for the specific car before finalising a decision.
- Check what warranty cover remains on any used vehicle.
MoneyHelper has free, impartial guidance on car finance options and what to look for in a contract. Their contact number is 0800 138 7777.
Important caveats
The FCA's review of motor finance commission arrangements was ongoing at the time of writing. The outcomes of that review may affect how car finance is sold and what information lenders are required to provide to consumers. Checking the FCA website and MoneyHelper for the latest guidance before signing any agreement is a reasonable step.
The figures and examples in this article are for illustration only. Actual rates, terms, and charges will depend on the lender, the vehicle, and your individual circumstances. This article does not constitute financial advice.
Related guides
- Personal loans, how unsecured personal loans work and what to compare
- Car finance, a fuller overview of car finance options in the UK
Sources
- Financial Conduct Authority (FCA): motor finance and consumer credit regulation
- MoneyHelper: car finance guidance for consumers