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Car finance explained

There are many options when it comes to funding your next car, van or bike and we want to make sure you can choose one with confidence. If you’re looking to spread the cost of your payments over a a set period of time , finance could be a good option for you.

Below, we explain the types of car finance available, the ins and outs of car finance checks and insight into how MotoNovo handles the whole process.

What does car finance mean?

Firstly, let’s explain the underlying concept of this article: car finance itself.

Put simply, car finance refers to the process of borrowing money to fund the purchase (or loan) of a vehicle over a set period of time. This money can be borrowed from places such as banks or building societies, with the money owed being repaid every month until the sum reaches zero.

Types of car finance

Hire Purchase (HP)

A HP agreement* lets you spread the cost of your vehicle, plus any interest and the ‘option to purchase’ fee at the end, by paying fixed monthly repayments, usually over 12 to 60 months. Once you have paid all the monthly repayments, the vehicle is yours.

 HP could be good for you, if:

  •  You like equal repayments
  • You want to choose the length of your finance agreement to suit your budget
  • You want to own the vehicle at the end
  • You don’t want any mileage restrictions

Personal Contract Purchase

Similar to a HP agreement, a PCP agreement* lets you spread the cost of your vehicle by paying fixed monthly repayments, usually over 36 to 48 months. At the end of your agreement, you pay a final balloon payment so you benefit from lower monthly repayments compared to HP.

At the end of your agreement, you have 3 options: retain, return or replace the vehicle.

  • Retain: you keep the vehicle by paying the balloon payment and option to purchase fee.
  • Return: you hand the vehicle back to the finance lender, so you don’t pay the final balloon payment.
  • Replace: you part exchange the vehicle at a dealership and get a new one.

PCP could be good for you, if:

  • You want flexibility when it comes to your end of agreement options
  • You want lower monthly repayments compared to a HP
  • You want to choose the length of your finance agreement
  • You’re happy to pay the larger balloon payment at the end of the agreement if you decide to keep the vehicle
  • You can stick to your expected mileage

What checks are done for car finance?

So, what checks are done for car finance?  When applying for finance, lenders need to make sure that the agreement is not only manageable for you, but that you also meet their lending criteria.

In total, a lender will typically undertake the following checks:

Proof of identity

This is a basic part of all credit checks. It ensures lenders know who the borrower is and eliminates the possibility of identity theft or fraud.

The identity check is simple and covers:

  • Name
  • Marriage status
  • Residence
  • Date of birth

Proof of address

Sometimes, a lender may ask for you proof of your address. This may be a simple step, but you should always ensure you get it right. Having incorrect address details can impact a car finance application significantly.

Most lenders will accept:

  • Utility bill
  • Council tax
  • Tenancy agreement
  • Bank statements
  • Building Society or Credit Union statement

Income

You’ll need to provide information on how much you earn. That way, the lender can see if the finance agreement is manageable for you.

Credit checks

There are two types of credit checks a lender will carry out:

  • Soft credit checks
  • Hard credit checks

A soft credit check is a brief overview of your credit. It scans your history and has a top-level look at it, giving the lender a general idea of your credit health. This doesn’t impact your credit file.

A hard credit check is a little different. It's more detailed and leaves a mark on your credit rating. If you have too many hard credit checks in a short time, it may paint you as a frequent, unreliable borrower to lenders.

A soft credit check gets an agreement in principle with the lender. Once an agreement in principle is made, then a hard credit check is performed.

During a credit check, it’s important to remember that lenders will be able to see if there are any CCJs (county court judgement) in place, defaults, if you’ve filed for bankruptcy etc. Responsible lenders need to ensure that when entering a new agreement that not only is it manageable for you, but that you also meet the lending criteria.


*Remember:

  • Finance is subject to affordability checks and is only available to UK residents aged 18 and over.
  • If you don't keep up with your repayments, the vehicle may be repossessed. 
  • With a HP agreement, you don’t own the vehicle until you’ve fully repaid the finance and the option to purchase fee at the end.
  • With a PCP agreement, you don’t own the vehicle until you’ve fully repaid the finance including the balloon payment and option to purchase fee at the end. Additional charges may also apply if you exceed your agreed annual mileage and don’t keep the vehicle in good condition. 

Motor tips from MotoNovo

Get clued up on all the latest news from by sticking to our blog. There, you can find guides, advice and tips and tricks on finding a car, keeping it running, and financing it in the best way for you.