The Complete Guide to the Hidden Costs of Car Finance

Car finance is the fast-track to buying the car of your dreams without having to wait to have all your finances in place. 

Motor finance hit a record of £41 billion with 2.1 million transactions, showing how popular car finance has become. However, these headlines have been accompanied by stories of mis-sold car finance agreements, which resulted in one of the biggest car finance scandals in the UK. 

Consumers have become, and rightly so, sceptical of car finance agreements, with many wondering about the hidden costs that are usually found in the small print. I am running a few minutes late; my previous meeting is running over.

At Octane Finance, we believe that car finance should be straightforward, and we work on a principle of transparency and understanding with our customers. We’ve created a comprehensive guide that covers hidden costs, as well as costs that are often forgotten or not clearly explained when entering a new car finance agreement. 

APR: The Misunderstood Value 

The one figure you’ll see every time you’re looking to buy a car and considering a finance deal is APR. APR, or the Annual Percentage Rate, is the cost of borrowing or interest rate. 

The cost of borrowing includes interest and lender fees, and it shows you how much more you’d be paying across the overall agreement. The higher the APR, the more you’ll pay overall, even when your monthly repayment figures look affordable. 

It’s always a good idea to shop around for a car finance deal with a lower APR; you can use comparison websites or a broker to help you find the best deal. A good credit score is what usually allows you to shop around for a low interest rate, but regardless of your credit file, comparing deals is the best way to find something that truly suits your needs. 

Depreciation 

Depreciation is not often talked about when you’re buying a new car; no one really wants to be reminded of how much your newly acquired car will lose in value. Unfortunately, you need to keep this in mind when getting out car finance. 

New cars usually lose between 15-35% of their initial value in the first year, and by year 3, that percentage is closer to 50-60%. This matters because if your outstanding finance is higher than the car’s market value, you are in what’s called negative equity.

Negative equity is also known as “upside down” finance, and it can be an issue if you’re looking to sell, part-exchange, or get out of your car finance agreement early. You can avoid negative equity by avoiding low-deposit or zero-deposit deals and checking the resale value of the car you want to buy. 

Mileage Limits 

When entering a car finance agreement, pay close attention to mileage limits, as exceeding them can trigger extra mileage charges that add up quickly, since you’ll pay per extra mile you drive. 

A higher mileage allowance in your agreement might cost a little extra, but less than going over the established mileage limit. 

Buying Fees 

If you’re taking out a Personal Contract Purchase (PCP) agreement or a Hire Purchase (HP) agreement, you will encounter fees at the end of your agreement if you want to buy the vehicle. These are often forgotten when taking out a car finance agreement, but you should keep them in mind before choosing a deal. 

Ballon Payment 

PCP is often the most popular finance agreement because the monthly repayments are lower compared to other deals. The lower monthly payments are because you’re paying the depreciation of your vehicle and not the full car’s value. If you want to buy the car, you’ll be left to face the so-called “balloon payment”, which is a lump sum that accounts for the full value of the car that you didn’t pay during the monthly repayments. 

Ownership Transfer Fee

With HP, you pay the value of your car across an agreed timeline. At the end of the agreement, you usually pay a £150 or £200 fee to transfer ownership from the lender to yourself. 

Damage and Condition Charges 

If you take out a PCP or leasing deal, the lender will inspect your vehicle when you return it. These inspections will ensure that the vehicle is in good condition. As always, a normal amount of wear and tear is expected, as set by the British Vehicle Rental and Leasing Association. However, anything that is considered more than wear and tear, such as scratches longer than 25mm, dents, damage to the alloy wheels and stains and burns, will be charged. 

Get Expert Support with Octane Finance

At Octane Finance, we know car finance can be complex. That's why we're here to help you navigate every step of your car finance journey, whether you're looking to settle existing finance, sell your vehicle, or explore new finance options.

While we’re a broker, not a lender, we can still offer expert guidance on settling your existing car finance and source competitive rates on new car finance packages. We pride ourselves on making car finance simple and accessible for everyone. With years of experience in the automotive finance industry, we've helped thousands of customers across the UK manage their car finance needs successfully.

Ready to Take the Next Step?

Don't let car finance complications hold you back. Contact us today to discuss your options. Whether you're looking to settle the finance on your current car, upgrade your vehicle, or start a new agreement, we're here to pair you with your perfect lender. 

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The Hidden Costs of Car Finance FAQs

What is APR and why does it matter when choosing car finance? 

APR (Annual Percentage Rate) shows the total cost of the borrowing, including interest and lender fees, calculated as a yearly rate. The higher the APR, the higher the borrowing costs. 

What is negative equity, and how can I avoid it? 

Negative equity is when the amount you owe is higher than the value of the car. To reduce the risk of negative equity, check the car's resale value and avoid zero-deposit finance deals. 

What happens if I go over my agreed mileage limit? 

If you go over your set mileage limit outlined in your finance agreement, you will likely have to pay an extra-mile charge, where you're charged for every extra mile you drive. 

Is there a downside to paying off your car finance agreement early? 

Sometimes charges can apply if you decide to pay off your car finance early. It's always best to check your finance agreement, as paying early may not be cheaper.