How does financing a used car work?
There are different types of car finance you can take out. The four main types are:
- Hire Purchase (HP) – this is where you pay a deposit initially and then make set payments over an agreed period of time. Once you’ve made the final ‘balloon payment’, you own the car
- Personal Contract Purchase (PCP) – similarly to HP you pay an initial deposit and then set monthly payments. The difference is, you tend to make smaller monthly repayments, then once the term is up you have to give the car back or pay the remaining sum to keep it
- Personal Contract Hire (PCH) – also known as car leasing. You rent the car from the finance provider for a set amount of time and make monthly payments to do so. Once the agreement ends you give the car back
Can I finance a used car from a private seller?
Certain lenders allow you to buy a used car on finance from a private seller. However, your choices might be more limited because many providers prefer you to buy from known dealerships.
There may also be some additional factors you need to consider, such as:
- checking the vehicle to see whether it is being sold legally
- making sure it isn’t being used to secure a loan or already has car finance taken out on it
Note: You can’t get car finance on a car that is already being used as collateral for a credit agreement.
Secondhand car financing can be risky if you’re going with a private seller because you might not spot certain faults with the car. Unless you’re a mechanic, it’s best to get an expert opinion before making a purchase. Otherwise, you may find yourself stuck paying off a faulty car.
Is it a good idea to finance a used car?
To help you to decide whether secondhand car financing is a good idea, consider the pros and cons carefully.
- your credit score may increase – since car finance is a form of credit, making your payments on time, every time will positively impact your credit score. However, if you miss or make late payments, you risk damaging it
- it could be cheaper than getting a new car – this means your car finance payments may also be cheaper and you may end up paying the car off sooner
- there’s more flexibility – with different options for purchasing a used car on finance, like HP, PCP and PCH, you can find an option that suits your finances
- you can access a car more quickly – if you don’t have the money to pay for a car outright or buy a new one on finance, secondhand car finance may enable you to get driving quicker
- you’ll probably need to pay interest – as 0% interest on secondhand car financing only available from certain dealers for people with a good credit score
- there may be wear and tear costs – depending on what type of finance you take out the provider may want the car back in exactly the same condition – even though it’s used
- you need to be able to afford the payments – if your circumstances suddenly change and you stop being able to make the payments, you risk losing the car or incurring fines
- used cars can be less reliable – with more miles on the clock, a used car may need some repairs now and then. Check whether your agreement states you need to pay for these yourself
Is it better to lease or buy a used car?
This depends on you – first of all, can you afford to buy a car? If you can afford to buy a used car outright, then this might be a better option than new or secondhand car financing because you’ll avoid being in debt and paying interest.
If you need to access a car for work but can’t afford to buy a new one, leasing a secondhand car may be a suitable option instead. However, you also need to factor in repair costs that are usually higher with secondhand cars since they’re more likely to come with a bit of wear and tear.
How much does it cost to finance a used car?
The cost of buying a used car on finance will vary greatly between lenders and which car you’re looking to purchase. It will also depend on your credit score and an affordability check conducted by the lender.
After all, they want to make sure that you can afford the payments on the car. Having said that, it’s likely that you’ll find it cheaper to finance a used car than a new one because new cars are generally of higher value.
Can I get 0% financing on a used car?
0% financing is where you don’t pay interest on the amount you borrow, usually for a set introductory period. You usually need to have a good credit score to be eligible for this, because the lender wants to make sure you are a reliable borrower. If you don’t have great credit, they might consider you risky to lend to.
0% financing deals are more likely to be available on new cars than used cars, as car dealerships often use these offers to attract customers – especially when they want to make room in their showrooms for the latest models. However, there may be some providers who offer 0% financing deals on used cars – but they might be few and far between.
Are used cars cheaper to insure?
Used cars can be cheaper to insure than new cars – but this isn’t always the case. On the one hand, used cars are cheaper for the insurer to replace, pushing the insurance costs down. On the other, secondhand cars are more likely to break down and need repairs more often. This could make your insurance more costly.
Insurers will weigh up these factors along with information about you, like your driving history, to make a decision about how much your insurance should be. This means the cost of insurance can differ between providers, so you should look into a few options before making a decision.
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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 21.9%, an annual interest rate of 21.9% (Fixed) and a deposit of £0.00, the amount payable would be £172.09 per month, with a total cost of credit of £3,825.54 and a total amount payable of £10,325.54. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.