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What to know about car loans for new cars

What to know about car loans for new cars
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Around 90% of the 2.3 million new cars sold each year in the UK are paid for using some sort of financing provided by a finance and leasing association (FLA) member. If you are in the market for a new car, you may already be considering getting a car loan. But what’s the difference when using a loan to buy a new car versus a used car? And is the process any different? We’re here to break down everything you need to know about car loans for new cars.

Loans for new cars

Typically, someone buying a brand new car will do so using a personal contract purchase (PCP) agreement. This is where you get a loan for the difference in price between the car’s brand new value and its predicted value at the end of the agreement.

This type of finance deal suits new cars. One of the major problems when buying brand new is that the car depreciates in value as soon as you drive it out of the showroom. A PCP can mitigate this risk. The loan amount is only for the difference in value from the start of the agreement to the end. You are not committed to paying the full price of the car. If you then decide you want to keep the car, you can make what is called a ‘balloon payment’ at the end of the agreement.

Alternatively, you can buy a new car using a hire purchase (HP) agreement. Basically, it is a loan secured against the car you are buying. You typically make a deposit and then make fixed monthly payments over a set period of time.

If you are buying a new car, you may find that there are better finance deals available. Dealers will sometimes offer 0% deals on new cars that they need to sell. And as they have sales targets to hit, they are sometimes more inclined to offer a favourable deal in order to secure the sale.

You may also find that PCP deals include servicing packages, insurance and maintenance. This could make keeping track of your monthly payments that bit easier.

Just be aware that a brand new car is likely to cost more than a used car. So while the interest rate may be lower, the overall cost of buying the car will still be higher.

Loans for used cars

If you’re buying a used car, you have similar finance options. Yo can choose from a PCP or HP agreement or a regular unsecured loan. 

If you are looking at PCP or HP deals, you may find you come up against higher interest rates than if you were buying a new car. This is because dealers will want to push certain cars. And therefore offer the more competitive finance packages on the cars they need to sell.

While the interest rate may be higher, the overall cost of a used car is likely to be lower than a new car. So your PCP or HP payments are likely to be smaller purely because the car itself is cheaper.

And as the value of the car is lower, it’s likely that insurance premiums will also be lower. 

Other information

For more on the different types of car finance available, check out our car buyer’s guide to car loan financing. Or if you want to find out more on how car loan interest rates work, take a look at the basics of car loan applications.

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