The UK market for used cars is thriving. According to the Society of Motor Manufacturers and Traders, 2016 was a bumper year for the used car industry and set a record for sales. 8.2 million used cars were sold last year, which represents a 7.3% increase on the year before. So, the market is booming – and for many people the simplest and fastest way to secure the right second hand car is with car finance. But what are the options if you’re looking for used car finance and are there any risks in doing so?
Used car finance – the market
If you’re looking for a cost effective car purchase then the chances are you have considered a second hand vehicle. The market for used cars is very different today to 20 years ago. Back then, if you were looking for a used car, then you were most likely going to be buying from an individual or a dealership handling genuinely second hand cars that had seen relatively intense road usage. Today, it’s a different story. When it comes to buying brand new cars, 8 out of 10 are now purchased via a Personal Contract Purchase (PCP). These PCPs are structured so that around half of the value of the car is paid off over a period of 3-4 years with the other half due as a bulk payment at the end of the contract. However, large numbers of people now don’t make that bulk payment but instead hand the car back to the dealer and move on to another PCP. Why is this relevant to the used car market? Well, because it is now hugely inflated by those ex-PCP vehicles. So, if you’re looking for a used car you’re going to have a much wider range of choice and from vehicles that have only been in use for 3-4 years.
The options for used car finance
Typically, if you’re looking to arrange used car finance you will have two options:
A finance plan offered by the car dealer
A finance plan offered by a specialist lender or broker (e.g. Zuto)
The finance on offer might be a PCP – i.e. where you make payments over a period of 3-4 years and then either pay off the rest of the contract or walk away. Or you could have the option of Hire Purchase (HP), where the decision about ownership is made at the start of the contract and you gradually pay off the value of the car until it’s yours.
Car dealer vs. specialist lender or broker
There are a number of different factors to bear in mind when you’re choosing who to arrange the finance with:
The plan itself – are you being offered HP when you want PCP or the other way around? Opt for the finance provider who gives you the arrangement you want.
Repayment period – some lenders and brokers offer longer repayment times than car dealers.
Interest and charges – how much interest are you going to pay and are there any hidden charges? Make sure you know exactly how much the deal will cost before you sign anything.
Options for bad credit – if you don’t have a perfect credit score then you might have a better chance of getting used car finance with a specialist lender or broker.
Borrowing amount – which option gives you the flexibility to borrow the amount you need to fund the car purchase that you want?
Which option gives you the best range of extras e.g. full vehicle checks, a reputable name in finance, free service?
What are the risks?
The car finance market in general is under a spotlight due to the lack of published figures about the way that it operates. We currently owe £30 billion for cars as a country and there are no statistics to show whether the PCPs that are so popular are getting people into trouble with debt. The main risk for anyone using a PCP is the payment requirements. Although you can walk away from a PCP deal you can’t do this until a substantial proportion of the vehicle is paid off – usually half, including interest and fees. If you want to walk away before that point then you could find yourself with a large bill owing to the car finance company or dealer. So, how can you protect yourself when arranging used car finance?
Is it affordable? Make sure you’ll be able to keep up with all the repayments
Opt for a reputable broker, dealer or lender. Several car finance companies have recently gone bust so it’s important to choose a reputable business
Ensure the valuation is accurate. PCPs use a predicted valuation based on what the car will be worth in 3-4 years time so make sure that valuation is accurate
Choose the PCP term carefully – a longer term means lower monthly payments but a shorter term means less interest to pay
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read more about Amanda Gillam