How is Car Finance Calculated?

When it comes to buying a car, most dealerships will more than likely offer you a finance scheme as it’ll bring them more revenue. However, there are benefits to the customer as well if they choose to buy on finance. It allows customers to spread out the large lump sum of the vehicle over the set number of months, making high specification cars more accessible while giving you the freedom to drive away with the car you want and not be too limited by budget.

What is Car Finance?

Car finance involves spacing out payments of a car over a 1-5 year period, where you’ll make monthly repayments until the end of your agreed period. Usually, you’ll be required to pay a deposit which will be subtracted from the car’s value, the leftover amount plus interest will make up what you’ll be paying back. Of course, there are several types of car finance, so what exactly goes into calculating the payments will differ 

How is Car Finance Calculated?

Even though car finance is a standard way of purchasing a car, knowing the different finance types or even how it’s calculated might still be a mystery to some. Calculating car finance depends on the finance type that’s being used as the three main types of car finance: Hire Purchase, PCP and Personal Leasing all have individual factors that go into how payments are determined. 

Hire Purchase

When it comes to Hire Purchase, payments tend to be higher as you are able to own the vehicle at the end of the agreed period. You’ll be expected to pay a small deposit, usually, 10% of the car’s value, which is then subtracted from the remaining value of the car and interest is added. Payments are then split up into monthly instalments to be paid back over a 1 to 5 year period.

PCP

Calculating finance for a PCP deal is similar to hire purchase, except that you’re instead paying back the car’s depreciation which is calculated by how long you’ll be driving the car. You’ll still need to pay a deposit of about 10% of the car’s value, and then the car’s depreciation plus interest is what will make up your monthly instalments. The length of the contract and agreed mileage limits also affect how the payments are calculated, so it’s best to be sure of the limits you can stick to in order to avoid additional charges. 

Personal Leasing 

The final finance type is known as Personal Leasing, has a few more requirements when it comes to calculating how much finance you’ll be paying. The car’s value, depreciation, lease length, agreed mileage limits and road tax are added together in order to calculate your payments. You can also opt for breakdown cover to be included on the lease agreement which will raise the cost of your payments but could be a necessary addition for peace of mind. 

Getting Accepted for Car Finance

You’re more likely to get accepted if you have good credit, stable income, little to no debt and how likely you are to be able to make the repayments. Lenders are more likely to accept you if you have a good credit score because it shows that you are good at keeping up with payments and the lender will feel more comfortable about getting their money back.

You may be refused finance because you have a poor credit score, have missed payments in the past or if you don’t have any credit history. However, there are few ways that you can improve your credit score and improve your chances of getting accepted:

• Keep up with your payments - making payments on time, every time, will reassure the lender that they are more likely to get their money back.

• Save for the deposit - you may receive a better deal with a deposit and lenders may be more likely to consider your application.

• Register to vote - it lets lenders know you have a fixed address, confirms your identity and lets them contact you

• Check your credit history - finding any mistakes in your credit history and fixing them improves your credit history

• Use a guarantor - someone with good credit can take out the loan with you, you’ll both be responsible for the loan and they will liable to pay if you fall behind on your payments.

• Research different finance types - you can determine what car finance type is most suitable for you, as hire purchase payments tend to be higher than PCP and personal leasing. 

The main thing to take into account when looking for the best car finance deal for you is to check the APR - this is the interest that you’ll be paying back alongside the value or depreciation of the car. Since car finance plans can range from 1 to 5 years, it’s good to get an idea of your long-term goal when it’s over - lower monthly repayments will mean paying back the loan over a longer period of time as opposed to higher monthly repayments. Not all finance types allow you to own the car after you’ve made all the payments, while that’s guaranteed with a hire purchase deal, choosing a PCP deal for a car you later want to own can be more costly as you’ll need to make that “balloon payment”.

If you’re interested in used car finance in London and the surrounding areas, Hilton Car Supermarket may be able to help you. With over 200 cars in stock from family cars to coupes, we can help you drive away with the car you want. All you need to do to get started is use our finance calculator on our website, enter some of your basic information and we’ll be able to accurately offer you an instant no-obligation quote.

Because we are a finance broker, our relationships with specialist lenders and motoring houses allow us to consider each finance application we get, and we may be able to arrange finance for you even if you have poor credit.