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The used car business is booming. <a href="https://www.smmt.co.uk/category/vehicle-data/used-car-sales-data/">Used car sales data from SMMT</a> reveals that transactions increased by 11.5% in 2021 alone, with over 7.5 million units being sold over the course of the year.

Despite the common nature of used car purchases in the UK, the process still involves a lot of research, careful planning, and consideration. 

Cars can be expensive - even second or third hand options. In fact, a car purchase is often amongst the largest purchases individuals will ever undertake. 

Fortunately, there are several <a href="https://www.caruno.co.uk/car-finance">car finance</a> options available if you don’t want to make the full payment upfront.

Many of these finance choices will require a credit check. For those of you with a poor credit history, there are many factors you need to be aware of, as well as the ways in which you can improve your standings.

Read: <a href="https://www.caruno.co.uk/advice-and-guides/car-finance-with-bad-credit">Can you get car finance with bad credit?</a>

With caruno, you’ll be offered the finance that’s most suitable for you, based on your personal requirements and financial circumstances.

We’d also like to help you understand what your car finance options are, and what each of them entails.

So, if you want to know - what is the best way to finance a used car? We’ve got all the need-to-know information.

As mentioned, there are several types of used car financing options available to you.

If you’re undecided over whether you want to buy or lease a used car, a personal contract purchase (PCP) is a great go-between for you.

A <a href="https://www.caruno.co.uk/car-finance/personal-contract-purchase">PCP</a> effectively works like a long-term rental agreement.

You’ll usually start this agreement by paying a deposit. The agreed upon set monthly repayments will depend on the deposit size - the larger the deposit you choose to pay, the lower the set monthly repayments will be. 

PCP is a low-cost way to drive the car you want because your payments are based on the depreciation value of the vehicle, which is determined by the difference in its cost at the start of your agreement and its predicted cost at the end of the agreement.

Both the car’s age and mileage will also be a factor. The better your chosen car holds its value, the lower your monthly repayments will be. 

With a PCP deal, these monthly repayments are typically affordable, as you’re not covering the full expense of the car. This means higher-end cars are potentially within your reach.

When your term is up, you’ll be given the option to part exchange your car, and if you have any positive equity, you can put this towards your next car. If you’d rather own the car, you have the option to make one final balloon payment and buy the car. Or, simply, return the car to the finance company and walk away.

If you’re looking to lease a used car instead of owning one, a <a href="https://www.caruno.co.uk/car-finance/personal-contract-hire">personal contract hire </a>(PCH) will probably be your best option. 

As with a PCP, a PCH also works like a long-term rental agreement. 

It’s also the most affordable way to get your hands on higher-end cars, and more modern models. 

To begin the process, you’ll have to decide which used car you’d like to lease. Other factors you’ll have to consider are – the length of your contract, your annual mileage, and the size of your initial payment, if you choose to make one. 

If you decide to put down an initial payment, you’ll need to decide how much you’d like the amount to be. The larger the initial payment, the lower your monthly repayments will be. 

These monthly repayments are fixed and are usually lower than PCP and HP options.

With PCH, you return the car to the finance company at the end of your contract, and simply walk away.

If you want to buy a car in the UK, a <a href="https://www.caruno.co.uk/car-finance/hire-purchase">hire purchase</a> (HP) is your best option. 

This type of finance allows you to pay off the remaining balance of your used car, plus interest, in monthly instalments over a set period. Usually, 24 to 48 months. 

This could place higher-end cars within the reach of those who otherwise couldn’t afford them.

The process begins with you applying for the finance and a credit check being carried out to assess your affordability. If approved, you’ll secure a loan from a finance company. This amount will be equal to the remaining value amount of the car you want to buy. 

You’ll then need to put down a deposit – subject to your approval and the dealership/company’s requirements. The car itself will serve as collateral for the loan.

When the agreement comes to an end, the car will be officially signed over to you – meaning you will then own it. 

In some cases, you’ll have to make a final payment in the form of a processing fee. This is called an Option to Purchase fee and can range in value from £1 to £200.

Paying in cash could be the most cost-effective way to buy a used car. However, with the rising cost of living, this may not be an option for everyone. 

With this type of finance, you’d pay the full value of the car upfront. Depending on your financial situation, this could leave you a little cash strapped. 

If you don’t have the cash readily available, it could take some time to save enough money.

On the plus side, paying in cash means you won’t have to worry about loan interest fees, admin fees, or processing fees, that come with rental instalment plans. 

Buying outright also means avoiding any credit checks. 

You could also eventually benefit from the resale value of the car.

Borrowing money from family or friends to buy a used car is another option. 

Not everyone has family members or friends who can afford to help in this way, however, if someone is willing to lend you the money, it could make the process of buying your used car a whole lot easier.

In this way, much like paying in cash, you’ll avoid any potential processes that come with finance approvals and installment plans. 

Even when it’s a family member or a friend that you’re borrowing money from, it’s a good idea to make sure a thorough understanding is reached regarding your repayment plan. 

No one wants to put strain on their personal relationships by failing to fulfil the terms of their agreement.

Loans are yet another used car finance option. But which type of loan is best suited to your circumstances?

If you opt for a personal loan to finance a used car, you’ll need to choose between a secured and an unsecured loan. 

Secured loans mean that an asset – such as a house - is used as collateral. If at any time you’re unable to repay the loan, your house could be repossessed in order to cover the repayment. 

Unsecured loans are usually smaller in size and don’t require collateral. They will, however, require a good credit rating. This type of loan can also mean higher interest rates.

If your credit rating is poor, a guarantor loan could be the answer. 

If a family member, close friend, or business colleague is prepared to make repayments if you can’t, the chances of you being approved for used car finance will be much higher. 

Again, not making repayments could place a strain on these relationships, so make sure you’re in the position to fulfil your agreement.

What is the cheapest way to finance a used car?

The cheapest way to finance a used car depends on different factors. These include whether you wish to own the car, along with your financial situation.

If you want to own the used car, then purchasing it outright, in cash, would be the most cost-effective option. 

For those who cannot afford this option, then HP would be the best way to go, as this option means paying off the car, in instalments, over an extended period, with fixed interest rates.

If you want to lease a used car, PCH will prove to be the cheapest option as monthly repayments are fixed, and are usually lower than PCP and HP options.

If you’re unsure of which approach to take, then a PCP is more than likely the best option for you, due to its flexible nature.

Alternatively, if you decide to borrow money from a family member or a friend, this could, depending on your agreement, prove to be a cheaper way to finance a car.

It all depends on your personal circumstances.

The length of time you can finance a used car depends on the company you deal with, the type of car finance you choose, and the terms of your agreement.

Loan repayments will depend on the agreement you make with the lender. It’s a good idea to select a repayment term that’s most suitable to your personal circumstances.

Explore your car finance options with caruno

caruno is committed to helping everyone find the most affordable and convenient using car to buy or lease. Try our fast and easy <a href="https://www.caruno.co.uk/check-eligibility">eligibility checker</a> to find out your likelihood of approval for car finance.

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