Questions you should ask when taking out car finance

Getting a car is often one of the biggest financial decisions you'll make. Whether you're buying a brand-new model or a used vehicle, there's a lot to consider and it's easy to overlook crucial details that can make a big difference. 

How you choose to pay for your car can have a lasting impact on your finances, so it's important to ask the right questions before committing. Doing so can help you avoid unpleasant surprises later on and ensure you make the most of your financial options.

What type of car finance options are available?

Car finance comes in various forms, and each one has its benefits and drawbacks. You may encounter terms like Hire Purchase (HP), Personal Contract Purchase (PCP), or personal loans. The type of agreement you choose will influence both your monthly payments and the ownership of the car. 

If you go for a Hire Purchase agreement, you'll make fixed monthly payments and own the car outright at the end of the term. A PCP, however, is more flexible, as it gives you the option to return the car, pay a final balloon payment to own it, or trade it in for another. 

To decide, think about how long you want to keep the car and whether you'd prefer to own it outright or swap it for a new model after a few years. For example, if you plan to keep the car long term, a Hire Purchase might work better. But if you like to upgrade every few years, PCP could offer you the flexibility you need.

What's the total cost of the loan?

Understanding the total cost of the loan is crucial before committing to anything. It's easy to be drawn in by attractive monthly payments, but it's just as important to factor in the interest you'll pay over the entire term of the loan. 

Ask for a breakdown of how much you'll pay in total, including interest, fees, and any optional extras such as insurance or warranties. Car finance can seem affordable with low monthly payments, but hidden costs can make it more expensive in the long run. Comparing these details across different providers will help you find the best deal for your budget and ensure you don’t get caught out by unexpected charges.

How long is the finance agreement?

The length of the finance agreement is another key factor to consider. Typically, finance terms range from 12 months to five years but longer terms often mean lower monthly payments. This might seem like an attractive option, but a longer agreement can also mean you'll pay more in interest and be in debt for a more extended period. 

While shorter finance terms may result in higher payments, they often allow you to pay off the loan faster, meaning you'll be free from debt sooner. Think about your financial stability and how much you can realistically afford each month without stretching your budget too thin. Likewise, if you're looking to get your bad credit history back on track this may be a helpful option for you in the longer term. 

As always, it's all dependant on your personal circumstances and it's important to choose a term that balances both your cash flow with your long-term goals.

Are there any fees or charges I should know about? 

When you take out car finance, it's important to ask about all the potential fees. Sometimes finance deals come with hidden costs, such as arrangement fees, early repayment fees, or late payment penalties. If you're likely to pay off the loan early or make adjustments to your contract, understanding these costs upfront can save you money. 

Ask the lender for a clear explanation of any additional charges you might face. For example, some car finance deals charge a fee if you want to return the vehicle before the contract ends. Others may impose fees if you miss a payment or are late. Knowing about these fees in advance will help you plan accordingly and avoid nasty surprises later.

What happens if I miss a payment? 

Life doesn't always go according to plan, and you may find yourself in a situation where you can't make a payment. It's important to understand the consequences of missing a payment before it happens. Ask the lender what options you have if you're unable to pay on time. Some finance agreements might offer a grace period, while others could impose penalties immediately. 

In the worst case, missing payments can harm your credit score and even result in the repossession of your car. However, some lenders may allow you to rearrange your payments or offer other solutions if you're experiencing temporary financial difficulty. Don't be afraid to ask about these options, it's better to know what to expect and how to deal with it should you face any challenges.

Do I have the option to settle early? 

If your financial situation improves or you simply want to pay off your car sooner, check whether the finance agreement allows you to settle early. Some lenders will charge you additional fees for early settlement, while others might not. You may also want to know how much of the loan you will need to pay off if you choose to settle early, as this can affect your decision. 

Being able to pay off your finance agreement early could save you a significant amount of interest in the long run. Ask the lender to explain the process and how much flexibility you have, especially if your situation changes.

What's the interest rate and APR? 

Interest rates and annual percentage rates (APRs) are two of the most important factors in determining how much you'll pay for your car in the long term. The APR reflects the true cost of borrowing, including any fees, and it's typically higher than the interest rate alone. 

Ensure you fully understand the APR and how it will affect your payments. A lower APR can save you a lot of money over the term of the agreement, but it's essential to check whether the rate is fixed or variable. If the rate changes during your agreement, you may end up paying more than you initially expected.

What happens if the car breaks down or is involved in an accident? 

Ask your lender what happens if the car is damaged or becomes unroadworthy before the loan is paid off. If the car is involved in an accident or breaks down, do you still owe the full amount, or does the finance agreement have any provisions for such situations? 

Some finance agreements include gap insurance or similar cover, which can protect you in case the car's value drops below the outstanding loan amount. Understanding how you're covered in such situations can provide peace of mind if something unexpected happens.