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Car finance ›
Is car finance worth it?
Chris Lambert, Product Development Manager, Friday, 5 April 2024
Updated: Friday, 5 April 2024
Updated: Friday, 5 April 2024
With car finance being a popular way of buying a car, it can be easy to think that financing is the best way to get your next vehicle. Whether or not this is the case depends on your circumstances and several factors.
In this guide, we explore the benefits and drawbacks of car finance agreements and instances where other ways of buying a car might be better. This way, you can make an informed decision before making any credit applications.
What is car finance?
When you take out car finance, you borrow money to cover all or some of the cost of the vehicle. Typically, you’ll pay a deposit and then make fixed monthly payments against the amount you’ve borrowed plus interest.
There are several different types of car finance, including:
- Conditional Sale (CS) agreements
- Hire Purchase (HP) agreements
- Personal Contract Purchase (PCP)
- Personal Contract Hire (PCH) plans
Car finance is usually spread over 24-60 months, depending on the type of finance and the lender you choose. Whether you’re looking for a new or used car, it can help you get onto the road without having to pay a large amount of money upfront.
It’s important to note that you are not the legal owner of a car on finance. Instead, you’re the registered keeper, and the finance provider owns the vehicle. Explore what this means in more detail in our guide – ‘Who is the registered keeper of a car on finance?‘.
When is car finance worth it?
It’s important that you fully understand how car finance works before making any applications. Let’s explore the benefits of car finance, so you can decide if it’s right for you.
If you want to spread out the cost of a car
Car finance deals typically last for several years, so signing up for one is a big commitment. It can help you spread out the cost of a car over a long period of time, so you don’t have to pay for it all in one go.
This helps you buy a car when you don’t have the money to pay for it all upfront.
Before you sign up for car finance, consider how much your monthly payments could be and other costs, like fuel and maintenance. You can use a car finance calculator to get an idea of what your agreement could look like.
If you want to change or upgrade your car
When you reach the end of your finance agreement, there are several options available to you depending on the type of finance. With CS and HP agreements, you’ll legally own the car after making your final payment. This gives you the freedom to keep, modify, or sell your car as you wish.
Additionally, if you’re looking to upgrade your car, you could part-exchange it and use it as a deposit for your next finance agreement. Some types of finance, such as PCP, allow you to give the car back and start another agreement on a newer car.
If you want to build your credit score
Financing a car may help build your credit score, as long as you repay it in full and on time. This is because, by making your payments on time, you show that you’re a reliable borrower. This can increase your chances of getting approved for credit in the future.
This can be particularly important if you have bad credit or no credit history and want to finance a car. However, there is no guarantee that car finance will improve your credit score, and it depends on how you manage your other debts as well.
With car finance being a popular way of buying a car, it can be easy to think that financing is the best way to get your next vehicle. Whether or not this is the case depends on your circumstances and several factors.
In this guide, we explore the benefits and drawbacks of car finance agreements and instances where other ways of buying a car might be better. This way, you can make an informed decision before making any credit applications.
What is car finance?
When you take out car finance, you borrow money to cover all or some of the cost of the vehicle. Typically, you’ll pay a deposit and then make fixed monthly payments against the amount you’ve borrowed plus interest.
There are several different types of car finance, including:
- Conditional Sale (CS) agreements
- Hire Purchase (HP) agreements
- Personal Contract Purchase (PCP)
- Personal Contract Hire (PCH) plans
Car finance is usually spread over 24-60 months, depending on the type of finance and the lender you choose. Whether you’re looking for a new or used car, it can help you get onto the road without having to pay a large amount of money upfront.
It’s important to note that you are not the legal owner of a car on finance. Instead, you’re the registered keeper, and the finance provider owns the vehicle. Explore what this means in more detail in our guide – ‘Who is the registered keeper of a car on finance?‘.
When is car finance worth it?
It’s important that you fully understand how car finance works before making any applications. Let’s explore the benefits of car finance, so you can decide if it’s right for you.
Car finance deals typically last for several years, so signing up for one is a big commitment. It can help you spread out the cost of a car over a long period of time, so you don’t have to pay for it all in one go.
This helps you buy a car when you don’t have the money to pay for it all upfront.
Before you sign up for car finance, consider how much your monthly payments could be and other costs, like fuel and maintenance. You can use a car finance calculator to get an idea of what your agreement could look like.
If you want to change or upgrade your car
When you reach the end of your finance agreement, there are several options available to you depending on the type of finance. With CS and HP agreements, you’ll legally own the car after making your final payment. This gives you the freedom to keep, modify, or sell your car as you wish.
Additionally, if you’re looking to upgrade your car, you could part-exchange it and use it as a deposit for your next finance agreement. Some types of finance, such as PCP, allow you to give the car back and start another agreement on a newer car.
If you want to build your credit score
Financing a car may help build your credit score, as long as you repay it in full and on time. This is because, by making your payments on time, you show that you’re a reliable borrower. This can increase your chances of getting approved for credit in the future.
This can be particularly important if you have bad credit or no credit history and want to finance a car. However, there is no guarantee that car finance will improve your credit score, and it depends on how you manage your other debts as well.
When is car finance not worth it?
There are plenty of positives to car finance, but there are also things you need to be aware of and consider before you take out a finance agreement.
If you don't want to be tied down to an agreement
Car finance agreements can last up to 5 years, so before you enter one, you need to be confident that your circumstances will stay the same.
If you plan to travel, for example, being tied down to a car on finance may make it trickier to save, or you may have to continue paying while you’re away.
Or, if you’re going to start a family soon and will need a bigger car, it’s important to know how that works and the processes depending on the type of finance you choose.
For information on the processes involved, read ‘How can I end my finance agreement?‘.
If you want to legally own the car straight away
Being the legal owner of your car means you can modify it, sell it when you like, and not be restricted by mileage limits. Some people prefer the autonomy of ownership, so they might use a personal loan or cash to buy their next car.
Some types of car finance, such as Conditional Sale (CS) and Hire Purchase (HP), mean you’ll become the legal owner of the car only when you make your final payment. During the finance agreement, you won’t be the legal owner, but you’ll be the registered keeper.
However, this isn’t always the case. With PCP, for example, if you want to legally own the car, you’ll need to make the balloon payment. With Personal Contract Hire (PCH) plans you will never get the option of being able to buy the car as it is purely a lease agreement.
If you may struggle to make your repayments
When applying for car finance, don’t forget about all the other costs of owning a car, like fuel, tax, maintenance, and MOTs.
If you have the cash ready, you may decide to buy it outright. This way, you don’t pay interest as you would with finance.
With car finance, you’ll repay the amount you borrowed plus interest. There may also be additional fees or charges, depending on the lender and type of finance you choose.
Because car finance is secured against the car, if you aren’t able to make payments, your car may be repossessed. It can also affect your credit score, making it harder to get credit in the future.
When is car finance not worth it?
There are plenty of positives to car finance, but there are also things you need to be aware of and consider before you take out a finance agreement.
If you don't want to be tied down to an agreement
Car finance agreements can last up to 5 years, so before you enter one, you need to be confident that your circumstances will stay the same.
If you plan to travel, for example, being tied down to a car on finance may make it trickier to save, or you may have to continue paying while you’re away.
Or, if you’re going to start a family soon and will need a bigger car, it’s important to know how that works and the processes depending on the type of finance you choose.
For information on the processes involved, read ‘How can I end my finance agreement?‘.
If you want to legally own the car straight away
Being the legal owner of your car means you can modify it, sell it when you like, and not be restricted by mileage limits. Some people prefer the autonomy of ownership, so they might use a personal loan or cash to buy their next car.
Some types of car finance, such as Conditional Sale (CS) and Hire Purchase (HP), mean you’ll become the legal owner of the car only when you make your final payment. During the finance agreement, you won’t be the legal owner, but you’ll be the registered keeper.
However, this isn’t always the case. With PCP, for example, if you want to legally own the car, you’ll need to make the balloon payment. With Personal Contract Hire (PCH) plans you will never get the option of being able to buy the car as it is purely a lease agreement.
If you may struggle to make your repayments
When applying for car finance, don’t forget about all the other costs of owning a car, like fuel, tax, maintenance, and MOTs.
If you have the cash ready, you may decide to buy it outright. This way, you don’t pay interest as you would with finance.
With car finance, you’ll repay the amount you borrowed plus interest. There may also be additional fees or charges, depending on the lender and type of finance you choose.
Because car finance is secured against the car, if you aren’t able to make payments, your car may be repossessed. It can also affect your credit score, making it harder to get credit in the future.
The pros and cons of car finance
There are several advantages and disadvantages of car finance that you should know before deciding how to buy your next car.
The pros and cons of car finance
There are several advantages and disadvantages of car finance that you should know before deciding how to buy your next car.
Buy a more reliable car
Car finance allows you to buy your next vehicle without paying the full amount upfront. This means you can get a newer, more reliable car than you otherwise may be able to if buying with cash.
Interest costs
Car finance usually involves paying interest, so you’ll pay more for the car in the long run than buying it outright with cash. If you have bad credit, you may find you are offered a higher interest rate than someone with good credit.
Spread the cost over time
Car finance helps you to spread the cost of the vehicle over several years. Depending on the type of finance you choose, you may be able to put down little or no deposit. For more information, read our guide to no deposit car finance.
Eligibility criteria
Everyone’s personal circumstances are different, as are their eligibility for car finance. If you have a low credit score, no credit history, or are self-employed, you may find it difficult to get accepted and you may need to use a specialist lender.
Fixed monthly payments
With most types of finance (including Conditional Sale, which is what we offer), the interest rate is fixed. This means you know exactly how much you’ll need to pay every month.
Depreciation
Cars lose value over time (also known as depreciation), and if you finance a vehicle, you may owe more on the loan than the car is worth. This is called negative equity; read all about it in our blog: ‘What is negative equity in car finance?‘.
Flexible terms
There are several finance options available. If you know you’ll want to own the vehicle, a Conditional Sale agreement gives you legal ownership of the car once you make your final payment. If you’re not sure and think you’ll want to upgrade in the future, PCP gives you several options including handing back the car to the lender and starting another agreement with a new car.
Commitment
Car finance agreements often last for several years. If your financial situation changes or you no longer want the vehicle, it’s not as simple as giving the car back to the finance company. You’ll need to check your contract and speak with them to discuss options.
Build your credit
Repaying car finance on time and in full can help you build or improve your credit score. This may make it easier to get credit in the future, however it is not guaranteed. There are lots of factors that can affect your credit score, and you’ll still need to repay your other debts in full and on time, too.
Restrictions
Some car finance options such as PCP include mileage limits, with a fee if you drive beyond the agreed limit. Additionally, you won’t be able to modify a financed car, and you may not be able to take it on holidays outside of the country (depending on your contract).
Buy a more reliable car
Car finance allows you to buy your next vehicle without paying the full amount upfront. This means you can get a newer, more reliable car than you otherwise may be able to if buying with cash.
Spread the cost over time
Car finance helps you to spread the cost of the vehicle over several years. Depending on the type of finance you choose, you may be able to put down little or no deposit. For more information, read our guide to no deposit car finance.
Fixed monthly payments
With most types of finance (including Conditional Sale, which is what we offer), the interest rate is fixed. This means you know exactly how much you’ll need to pay every month.
Flexible terms​
There are several finance options available. If you know you’ll want to own the vehicle, a Conditional Sale agreement gives you legal ownership of the car once you make your final payment. If you’re not sure and think you’ll want to upgrade in the future, PCP gives you several options including handing back the car to the lender and starting another agreement with a new car.
Build your credit
Repaying car finance on time and in full can help you build or improve your credit score. This may make it easier to get credit in the future, however it is not guaranteed. There are lots of factors that can affect your credit score, and you’ll still need to repay your other debts in full and on time, too.
Interest costs
Car finance usually involves paying interest, so you’ll pay more for the car in the long run than buying it outright with cash. If you have bad credit, you may find you are offered a higher interest rate than someone with good credit.
Eligibility criteria
Everyone’s personal circumstances are different, as are their eligibility for car finance. If you have a low credit score, no credit history, or are self-employed, you may find it difficult to get accepted and you may need to use a specialist lender.
Depreciation
Cars lose value over time (also known as depreciation), and if you finance a vehicle, you may owe more on the loan than the car is worth. This is called negative equity; read all about it in our blog: ‘What is negative equity in car finance?‘.
Commitment
Car finance agreements often last for several years. If your financial situation changes or you no longer want the vehicle, it’s not as simple as giving the car back to the finance company. You’ll need to check your contract and speak with them to discuss options.
Restrictions
Some car finance options such as PCP include mileage limits, with a fee if you drive beyond the agreed limit. Additionally, you won’t be able to modify a financed car, and you may not be able to take it on holidays outside of the country (depending on your contract).
Whether taking out car finance is the right choice depends on your financial situation and personal circumstances. Consider the pros and cons carefully and make sure you fully understand how car finance works before making any applications.
Read our full guide on how car finance works for more information on the different types of finance and their pros and cons.
Buy your next car with Moneybarn
We have over 30 years of experience helping people access car finance, even if they have bad or limited credit history. So, if other lenders have rejected you, we could help.
As one of the UK’s largest providers of car finance for people with bad credit, IVAs, and CCJs, we could help you onto a better road ahead.Â
Take your first step to getting on the road in a new car and see what your agreement could look like with our car finance calculator.
Representative 30.7% APR.
Whether taking out car finance is the right choice depends on your financial situation and personal circumstances. Consider the pros and cons carefully and make sure you fully understand how car finance works before making any applications.
Read our full guide on how car finance works for more information on the different types of finance and their pros and cons.
Buy your next car with Moneybarn
We have over 30 years of experience helping people access car finance, even if they have bad or limited credit history. So, if other lenders have rejected you, we could help.
As one of the UK’s largest providers of car finance for people with bad credit, IVAs, and CCJs, we could help you onto a better road ahead.Â
Take your first step to getting on the road in a new car and see what your agreement could look like with our car finance calculator.
Representative 30.7% APR.
For a better road ahead
Moneybarn is a member of the Finance and Leasing Association, the official trade organisation of the motor finance industry. The FLA promotes best practice in the motor finance industry for lending and leasing to consumers and businesses.
Moneybarn is the trading style of Moneybarn No. 1 Limited, a company registered in England and Wales with company number 04496573, and Moneybarn Limited, a company registered in England and Wales with company number 02766324. The registered address for these companies is: Athena House, Bedford Road, Petersfield, Hampshire, GU32 3LJ.
Moneybarn’s VAT registration number is 180 5559 52.
Moneybarn Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702781)
Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
