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Last updated: 02/02/2022 | Estimated Reading Time: 4 minutes

How much does it cost to finance a car? 

Financing is a central part of most car purchases. Knowing what to expect before you hand in your request for financial assistance will help with the overall buying experience. With this in mind, we’d like to tackle one of the most common questions asked by consumers, that is – how much does it cost to finance a car?

In This Guide:

How much does it cost to finance a car?

If you plan to use finance to purchase a car, then it’s important that you know what the repayments are going to be each month before entering an agreement. By knowing how much your instalments are going to be, you’ll be better placed to budget properly and stick to the terms of your contract.

Below, we’ll highlight some of the main factors that can contribute to car finance costs. 

The different types of finance options

Buying a car is no simple decision and ideally, you want a finance plan that’s going to best fit your lifestyle. That’s why most financial providers offer a variety of products. It’s important to remember that the type of product you choose will affect the size of your repayments, ad the overall cost of your finance plan. For example:

  • A Hire Purchase (HP) agreement - With an HP agreement, you will pay a small deposit (typically around 10%) and then you will hire the car from the finance company while you pay it off month-by-month. Once you have made the final payment, then the car will belong to you. Keep in mind that with an HP agreement, interest will be added to your payments.
  • Personal Contract Purchase (PCP) agreement - PCP offers the most flexibility, with a choice of 3 options at the end of your agreement. You can trade your car in for a newer model, pay a balloon payment (a large lump sum at the end) and keep the car, or simply return it to the lender. With this option, your monthly costs are typically lower and are based on the estimated depreciation of the car over the length of your contract, plus interest.
  • Leasing - Personal Contract Hire (PCH) – When you choose to lease a car, then you pay a fixed monthly amount for the use of the car. The payments are usually more than PCP but they include service fees and maintenance, which means that the total cost can work out cheaper overall. At the end of the agreement, you give the vehicle back.

The value of the car

The value of the car is one of the main influential factors on how much you will be paying towards your finance repayments. The higher the car is valued at, the more you will pay. 

The size of your deposit

A deposit can be used to reduce your loan amount and it also equates to less risk for the lender. It suggests that you’re more likely to continue with the remaining payments without any issues. The larger your deposit is, the lower the loan amount - and therefore your repayments - will be.

The length of a loan

All finance agreements will be fixed to a term of payment, usually 3-7 years. The length of this period will dictate the size of your monthly repayments. As a rule of thumb, the shorter the repayment term is, the more your instalments will be but the less you will have to pay overall. Your monthly payments will be less the longer your repayment term is – keep in mind, however, that with interest, you will pay more for the car overall.

Your credit score

Your credit score is calculated based on your credit history and sums up how creditworthy you are. If you have a history of paying your debts dutifully and on time, then you will have a good credit score. The better your credit score is, the better the chances are that you will be approved for a loan.

Fixed vs. variable interest

A variable interest rate can fluctuate over time. It's based on various factors including the Bank of England base rate, and if the rate goes up, so do your payments (and the same applies the other way round). This means that you could find yourself paying less interest on your repayments but you could also end up paying more.

A fixed interest rate doesn't change over a set period of time because it’s not linked to base rates. Fixed interest rate options are agreed upon before signing an agreement and will remain the same until the last payment has been made.

How to use a car loan calculator

If you’re shopping around for car finance deals, then a car loan calculator is a great way to help you determine how much your car finance repayments will be.

You can use our car loan calculator by adjusting the slides accordingly and by filling in a form with a few essential details. The calculator will then automatically calculate how much your monthly car instalments will be.