What You Need to Know Before You Enter a Car Finance Agreement

What You Need to Know Before You Enter a Car Finance Agreement

Before you enter into a car finance agreement, it is important to know exactly what you are buying. There will be certain aspects of your finance plan which can be altered and tailored to your circumstances, and other aspects that you can look at to determine whether or not you are getting a good deal.

Everyone’s financial situation is different, and it may be more affordable for some to pay make low instalments over long periods of time, while others may prefer to repay what they have borrowed as soon as possible. There are a few variables which can be changed to ensure that a finance plan is right for you.


You will be able to select the length of time that you would like your finance contract to last for, which will usually be between one and five years. If you choose to extend your agreement term, your monthly payments will be reduced, but you will pay more for the credit you borrow overall.

Monthly Payments

You can also choose the amount of your monthly payments. If you want your plan to be based around how much you are able to afford to repay each month, you can set this amount and then change the length of the contract term or the size of your deposit.


If instead you would rather choose the amount of money you are willing to put down as a deposit first, your monthly repayments will be determined by the amount of money that is left to be paid.

It is best to set either the duration, monthly repayments or deposit and then tweak the remaining two variable factors until you get the most suitable option for you.

Annual Mileage

For hire purchase finance, the only changeable aspects of your plan will be contract duration, monthly payments and deposit amount, but if you are applying for personal contract purchase, you may also be able to alter your annual mileage. This is an estimate of the mileage you will use each year of the contract period.

The higher your estimated mileage, the higher your monthly payments are likely to be. Your estimate will be used to calculate what the value of the vehicle is likely to be at the end of your agreement period. You should try to be realistic with your estimation, because if you exceed your anticipated mileage, you may incur additional charges when you return the car.

Credit Amount

It is important to distinguish exactly what you are purchasing, so you will need to know the amount of credit you will need to borrow, which will be the current value of the car minus the amount you will be putting down as a deposit.

Cost of Credit

You are essentially paying to borrow money, so you will need to be aware how much it will cost for the amount of credit needed to cover your vehicle of choice. This will differ between providers depending on the rate of interest that they offer and this will be the extra money you will be paying on top of the car’s original price.

Cash Price

It is good to know how much money you would be paying if you were to purchase the car with cash upfront to make sure that you will not be spending an excessive amount with a finance plan.

Total Amount Payable

To ensure that you are happy with the additional cost of credit, you should look at the cash price and the total amount that you will be paying if you purchase your car on finance. This is inclusive of your deposit, all of the scheduled monthly repayments and your optional final payment if you are looking at a PCP agreement.

Excess Mileage

You should always be wary of additional costs which could result in you paying more than necessary. If you sign up for a PCP agreement, you will be asked to estimate your annual mileage, which will be multiplied by the number of years that your finance plan lasts for to give the contract mileage. If you have exceeded this when you come to return your vehicle to the finance company, you will be required to pay a fee. Excess mileage is the pence per mile that will be added to your amount payable.

Option to Purchase Fee

Another additional cost that you should be aware of is the option to purchase fee. This is a payment usually due when your finance agreement finishes which is necessary for the transfer of the legal title from the finance provider to you, making you the legal owner of the vehicle. This should be a relatively inexpensive cost.

Arrangement Fee

Make sure that you are aware of any application charges that lenders may request before you enter a finance agreement so that you can factor this into any calculations you do and are not hit by any unexpected fees.

Interest Rate

You should be aware of the interest rate when you are shopping around for the best deal, because this is the percentage of the credit amount that is charged for borrowing money and it is what will determine your monthly payments. You will want to try and find the lowest interest rate possible to get the best offer. If you are using Smile Car Finance, we have access to some of the lowest rates on the market, so we can save you the legwork and get you the best rate in an instant.

APR Representative – Inclusive of interest rate, arrangement fee, option to purchase fee

Remember though, it is not just about the interest rate. To truly figure out the best deal, you will need to incorporate the option to purchase fee, any arrangement fees and any other extra costs into your calculations as well as the rate of interest. Annual Percentage Rates (APR) can be compared against various providers, and this will tell you who you will get the most cost-effective finance plan with. Fortunately, Smile takes APR into account when returning your finance quote.