The top 7 myths about car finance, busted!

    Here’s the deal: almost all new car sales in the UK are financed, either on PCP contracts or HP. They’re a great way for people to be able to drive the cars they want, without having to pay the whole cost upfront. 

    As with all financial products and contracts, there are some formalities involved in the arrangement between you and your car finance lender, that can be different depending on who you go with. However, there are some common aspects to car finance contracts that tend to be either very little-known, or misunderstood. 

    Read on to find out the truth about car finance myths, so you can get the most for your money.

    Myth 1: Car finance is for new cars only
    Myth 2: Car finance is bad for your credit score
    Myth 3: Car finance deals can’t be negotiated
    Myth 4: The best option is whatever has the lowest interest rate
    Myth 5: You should get the highest-value car available to you
    Myth 6: You can’t end your car finance contract early
    Myth 7: You lose money selling a financed car
    The best way to sell your financed car

    Most new cars are bought on PCP or HP finance. But, many aspects of these agreements are commonly misunderstood.

    Myth 1: Car finance is for new cars only

    Used cars can be bought on finance plans just as easily as new cars can. In fact, taking out car finance on a used car is a great way to build up equity for a more affordable asset.

    If you’re looking for a car and you know you’ll buy it on finance, it’s worth doing some research into the most reliable used cars, that you’ll be able to resell or trade in down the line without losing too much value. Prepare for bad news – some popular cars on the road are just not reliable enough to hold value well when sold third-hand. 

    Financing a used car can allow greater affordability, quicker availability, and a wider range of options. In the 2020s there have been lots of shortages affecting new car stock, making used cars more competitive, covering a range of budgets. It’s worth looking for the best quality car your money can buy. 

    Once you know what you’re shopping for, you should check out the options available with various reputable dealers, as well as trusted lenders. At this point, the search is nearly over! With a car in mind and providers identified, you should look for the best possible financing contract terms – more on this below.

    Myth 2: Car finance is bad for your credit rating

    When you are looking at car finance deals, make sure you’re aware of the actions that create soft or hard credit checks. Most finance calculators will not create a recorded check, but some direct finance enquiries will do so. The issue with recorded checks is that when they fail, they can be recorded on your credit report. The more failed checks that are visible, the worse the credit report looks to possible lenders.

    If you take out car finance and make all your repayments, you’ll be maintaining or improving your credit score. However, missed or late payments will almost certainly damage your score, so it’s definitely not worth taking out a contract you might not be able to pay.

    What a lot of people don’t know is that, once your contract has started, if you’re struggling with payments, you can request a renegotiation or payment plan to make the payments more achievable. This is much better for your credit score than failing to uphold the terms of your agreement.

    As with all loans and financial products, your car finance deal needs to make sense in relation to your income and expenses.

    Myth 3: Car finance deals can’t be negotiated

    Not only can you shop around for a great car finance deal, from all sorts of lenders like banks, credit unions, and online providers, but you can also then negotiate the terms of whatever deal you are offered.

    To get a car finance deal, you typically put your information into a finance calculator tool, and then get sent the terms of deals available to you over email. However, like with insurance and certain other financial products, you may be able to call the provider up and negotiate these terms. You may be able to enjoy lower interest rates if you pay a slightly higher deposit, for example, or lower the monthly repayments by extending the contract length beyond what’s offered.

    Myth 4: The best option is whatever has the lowest interest rate 

    There are several parts of a car finance agreement that determine its affordability: the overall car value and fees/commissions of the deal, the level of interest, the deposit, the monthly repayments, and the car running costs. 

    While the interest rate is very important, and key to the affordability of the loan, the length of the loan and total payable amount are also factors that can have a significant impact on whether the agreement works in your favour. By paying a higher deposit, or keeping the contract length short, you might make a finance agreement cheaper overall than if you had lower interest, but more debt payable over a longer period.

    It’s worth taking out your calculator and looking at the monthly cost versus the total cost of several different financing options – you may be surprised.

    When evaluating car finance deal terms, don’t forget to factor in the specific car’s likely depreciation rate – this will have a huge effect on the value you get from your deal overall.

    Myth 5: You should get the highest-value car available to you

    It’s tempting to look at the very nicest cars you could buy on a finance agreement with a low deposit and repayment plan, only to trade it in after a few months for progressively more desirable cars. 

    The logic behind doing this is based on assuming that the value of the car will stay very high, so over the first few years of driving, you’re underpaying – and then you switch out your car.

    However, this is simply not always a smart decision, for a few reasons. First of all, taking out a high level of debt is not generally recommended. Your financial health, credit score, and stress levels are at risk. 

    For another thing, cars devalue at very variable rates. Read our ultimate guide for more information on how cars depreciate. You might assume you’ll get a great trade-in deal partway through your contract, but the reality might look very different – deals are at car dealers’ and finance lenders’ discretion. Even if your car’s value stays high, you might not get that great an offer. 

    You may also unwittingly choose a bad time to sell or trade in your car – some cars drop a lot of value very quickly in the first three years, before plateauing (or at least, declining very slowly) for another few years. If you aren’t tracking your car’s ongoing value, you may miss out on a few years that could project you into positive equity – more on which below!

    The sensible course of action is to choose a deal that you’re confident you can afford for the contract duration. It will free up plenty of different options for getting the best long-term value out of the contract.

    Myth 6: You can’t end your finance contract early

    This is our favourite car finance myth to bust! There are, in fact, several ways to end your car finance early. You must read your contract carefully to make sure that you understand these options in relation to your own terms and conditions. Typically, the following all apply:

    • You can use your consumer right of voluntary termination to end the contract and give back the car if you’ve paid at least 50% of the total amount payable
    • You can contact your lender to discuss possible options if you need to change your contract terms
    • You can ask your lender for a settlement letter, and sell your car to a dealer who will clear the remaining finance (and you keep the surplus!)
    • If you’re still ensure get in touch with a good car finance broker who will give give you the low down on your rights before you make your purchase

    Myth 7: You lose money selling a financed car

    Cars are an asset just like any other, and car finance is a way to pay that asset off, having also paid a deposit. When you take out finance on a car that is more affordable to you, that is to say, a contract that you can pay off sooner, you’ll get to the point where the car’s value is higher than the remaining debt. This is called positive equity

    Once you’re in positive equity, you’ll keep any surplus when you sell your car. When you’re close to hitting positive equity, you should start tracking the value of your car to try to predict how quickly it will depreciate over the coming months and years, so you can sell at the perfect time. If there is any remaining finance, you can sell your car to a dealer who will clear the finance with your lender and pay you the surplus.

    If you sell your financed car while in negative equity, and the sale of the car does not clear all of the remaining settlement, you will have to pay the difference out of pocket. If it’s early in your finance contract, there may also be extra fees associated with selling at this time.

    The best way to sell your financed car

    If you’re thinking about selling your financed car quickly and easily, at Motorway we offer a simple – and completely free – method of getting the best price when selling, whatever the model. For financed cars, all we need to get started is a settlement figure from your finance company (including a balloon payment if you have Personal Contract Purchase finance, or PCP).

    First, enter your reg on the homepage and you will be provided with an instant estimated sale price based on up-to-the-minute market data. We’ll then ask you a few easy questions about your car and guide you through the photos you need to take to complete your vehicle profile. It can be done right from your phone – in a matter of minutes.

    If you choose to enter your car into a daily sale, it will be shown to our nationwide network of more than 5,000 verified dealers looking to add to their stock of used cars. Interested dealers will then compete to buy your car, offering you their best price.

    In as little as 24 hours you will receive your best offer – and, if you choose to go ahead with the sale, your car will be collected for free by the dealer and the money will be quickly and securely transferred to your bank account.

    Car finance can be a great way of building up equity in a car – an asset you can then decide to sell if it makes financial sense to you. Make sure your contract is clear and beneficial to you before signing.

    Should you sell your car?

    Want to learn more about the best ways to sell your car? Check out more of our guides here, covering everything you need to know about different finance schemes, and what they mean for you as a car owner.