How to finance a used car: Your options and how to save money

Enter the car details into the Magnitude Finance calculator (you can save as many quotes as you like)

Financing a used car offers you a flexible way to own the right car for you without having to cover the price of the vehicle in one go.

If you can’t afford to pay the full amount in a single payment, or you’d rather keep your savings intact and don’t want to tie them all up in a vehicle, used car financing allows you to spread the cost over monthly payments to meet your budgeting needs.

You will almost certainly have to pay for the privilege in the form of interest charged, but buying a used car on finance can get you behind the wheel for hundreds of pounds per month. This may be preferable to needing to find tens of thousands to purchase one outright.

Financing a used car offers you a flexible way to own the right car for you without having to cover the price of the vehicle in one go

And buying a used car instead of  a brand new one comes with some enticing benefits.

Generally, a used car costs less than a brand-new car, which will mean you will have saved on its initial depreciation - and monthly payments could cost less too.

New cars tend to undergo rapid depreciation in the first few years of ownership, so a used car may not only be considerably cheaper but can also hold its value better.

There can be a greater choice of vehicles and models within your budget range if you buy a used car, and your budget will go further.

The constant influx of new models to the market means older models shift across to the used market – and that means you should get a good choice of cars within your budget.

We explain how you can check what a used car would cost you each month and save on dealer financing with This is Money's partner Magnitude Finance.

> Compare used car PCP deals with Magnitude Finance

Different finance options:

There are three main car financing options: Personal Contract Purchase (PCP), Hire Purchase (HP) and a personal loan.

Personal Contract Purchase

PCP is the most common car finance option, with the Financing and Leasing Association (FLA) calculating more than 1.1 million motorists used PCP car finance in 2022.

You agree to a contract agreement that lasts usually between three and five years and make monthly payments over that period. An initial deposit is put down and the size of this can be flexible.

You can opt to keep your car when the contract ends, and pay a one-off, final ‘balloon payment’ - it will then be your car owned outright.

Alternatively, you can hand the car back when your contract finishes and won’t have to pay anything more.

Or as a third option, you can part exchange it (if the value is higher than the guaranteed future value) to fund a new PCP deposit.

PCP is the most common car finance option, with many people enjoying the flexibility it provides

The finance is structured with an initial deposit put down and then equal monthly instalments over the contract’s life.

Together the deposit and monthly payments are equal to the estimated depreciation of the car, not the full value.

PCP protects you against further depreciation shortfall against the projected future value of the car represented by the final balloon payment – which can be a real benefit.

But you must stick within the terms of the agreement, including mileage limits and making sure the car is not damaged. Otherwise, expensive fees can kick in.

PCP is popular because of the lower monthly payments compared to traditional hire purchase, along with the flexibility of being able to buy, return or exchange the car.

A downside to PCP (and hire purchase) is that, unless you’ve paid a third of the total amount payable, you are liable to have your car repossessed in the event of a default.

Hire Purchase

Hire purchase works in a similar way to PCP: you put down an initial payment and then pay monthly instalments after that (usually over a period of between two and five years).

But it has a different conclusion to PCP, as you own your car outright once the final balance has been paid off.

HP involves financing the full cost of the car and ultimately buying it outright, so monthly payments are higher.

You can increase the size of the deposit if you want to reduce your monthly payments.

When the contract comes to an end, you’ll need to pay an ‘option to purchase’ one-off amount before you can own the car fully. This payment tends to be smaller than the PCP ‘balloon payment’. Then the car is all yours.

You can finance a car entirely separately from the dealer and are free to shop around as much as you like - car purchase and car finance aren't tied together

You don’t need to just take dealer finance

Often people think that car purchase and car finance are tied together, with the dealership the only route to car finance.

But this isn’t the case – you can finance a car entirely separately from the dealer and are free to shop around as much as you like.

If you’re in the market for a used car and need car finance, then This is Money’s partner Magnitude Finance makes it easy to compare potential savings you could make on your car finance agreement.

Since the Financial Conduct Authority (FCA) banned the use of a ‘discretionary commission model’ for vehicle finance offerings in 2021, all dealers and finance brokers have to offer a set rate of finance.

Now it’s easy to compare multiple lenders’ APR rates with specialists like Magnitude Finance, which gives you access to rates from 8.9% APR Representative on PCP and HP.

This can be considerably below dealer rates, which average 14.9 per cent.

The potential savings you could make through our partnership with award-winning Magnitude Finance (8.9% vs 14.9%) could even cover a month’s car insurance or maintenance.

> Check how much a new car would cost you each month with Magnitude Finance

Compare PCP deals

A credit broker such as Magnitude Finance compares multiple lenders in one place, providing a quick and easy online alternative to dealer car finance.

To get a quote – whether for a supercar, daily driver or classic – and make the most of Magnitude’s competitive rates, just:

• Enter the car details into the Magnitude Finance calculator (you can save as many quotes as you like)

• Apply securely online (and get a quick decision) - you can also talk to a team member

• Once you’re approve you can eSign the documents and verify your ID with video

• Magnitude pays the dealer for you, and you can go and collect your car