Understanding car finance: A beginner’s guide


What is car finance?

Car finance is a way of borrowing money to help you pay for your car. It’s available from banks, credit unions and dealerships, who will usually put together their own offer for you. They might call it ‘finance’, ‘a loan’ or an ‘HP’. Whatever they call it, it will work in more or less the same way.

How does car finance work?

Your ‘dealer’ – whether it’s a bank, credit union or dealership – will put together an offer for you. They’ll base it on how much money they think you’re able to borrow, and your ability to pay them back. Here are a few things a good offer will have:

  • an initial payment to borrow a set amount of money for a set time, with a fixed interest rate attached;
  • how much you’ll pay each month towards the loan’s total cost. This is called the repayment amount or ‘repayment’;
  • any charges for setting up the loan;
  • the total amount you’ll pay back, including all interest and charges;
  • what to do if you can’t keep up your repayments.

How much could I borrow?

Depends on your income, expenses and savings. Car finance is different from other forms of finance like personal loans or credit cards because it takes into account things like how much you earn, and your regular outgoings. The dealer might ask for proof of income, like payslips or tax returns to show that you’re able to afford the repayments.

Things to look out for:

  • Make sure you understand what interest rate will apply to your loan;
  • Get a clear idea of exactly how much you’ll pay every month, and every year. If your repayments change, make sure it’s in a way you can afford;
  • Find out whether there are any extra fees involved, like application or processing fees. Fees on top of interest charges can really add up!

What happens if I can’t keep up my repayments?

If you miss payments, the lender has a number of options. They might try to contact you first to see if they can help. If that doesn’t work, then they could repossess your car and sell it in order to get their money back. You’ll also be responsible for any fees that arise from the missed repayments, like storage fees for keeping your car before it’s sold.

Unsecured vs secured car loans

An unsecured loan is just that – there’s no security involved, which makes it safer for the lender. A secured loan means you put up something of value as insurance for the loan. You might use your home or car as an extra guarantee that you’ll be able to pay back what you owe if you can’t make repayments on the loan.

Take your time

Choosing the right car, and car loan, for you can be a very daunting but exciting experience. We recommend taking your time to ensure that you find the perfect car and car loan for you. Whether you’re looking for Subaru or Mazda finance rates specifically, or if your main priority is getting the cheapest loan possible, there are a wealth of options available to you.

So there you have it, our guide to understanding car finance. We hope you found it useful!


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