Questions to Ask Before Signing a Car Finance Agreement

Getting a car through finance can be an easy way to afford a new vehicle, but it’s important to understand the risks involved. If the terms aren’t clear, you could end up paying more than you expected. In 2024 alone, more than two million cars were bought using finance in the UK, and experts expect the market to grow to £60.36 billion by 2025.

Interest rates for new cars have risen to 7.03% in the third quarter of 2023, compared to 5.26% the year before. For used cars, rates are even higher, around 11.35%. This makes it more important than ever to make sure you are not being overcharged or misled.

By asking the right questions before signing a finance deal, you can avoid hidden fees, high interest rates, and other unexpected costs. Taking the time to understand your agreement can help prevent problems and ensure you’re not a victim of mis-sold car finance.

Know the Full Picture

The rising costs and shifting interest rates mean that what appears to be an affordable monthly payment can quickly become overwhelming. Beyond the advertised monthly figure, you need to consider the total amount payable over the term, including commissions, arrangement fees, and interest. Failing to investigate each of these elements increases the risk of mis-sold car finance, where vital information may be concealed or misrepresented.

In 2023, average monthly payments for new vehicles climbed to around £726, while used vehicles averaged £533 per month. On top of that, Personal Contract Purchase (PCP) remains the most popular choice for approximately 55% of car finance customers. PCP can offer lower monthly costs but often involves a large “balloon” payment at the end—an arrangement that may not suit everyone’s long-term plans.

Key Point: Always ask for clarification if a dealership’s explanation of any term seems vague. You have the right to understand each aspect of your agreement before committing.

Key Questions About Agreement Terms

What is the total cost (including interest)?

A tempting monthly figure can mask a hefty overall payment. Insist on a complete written breakdown that includes:

• Principal Amount: The car’s sale price, minus any deposit or part-exchange.
• Interest Rate: Even a small percentage difference in interest can amount to thousands of pounds over time.
• Fees: Administrative, documentation, or arrangement charges may significantly increase your total bill.

With new-car interest rates at around 7.03%—up from 5.26%—and used-car rates near 11.35%, these increments can add up rapidly. Whether you choose PCP, Hire Purchase (HP), or another option, the long-term cost must always be weighed against what you can realistically afford.

Tip: Request a repayment schedule that clearly shows how each instalment will be calculated up to the very last payment.

Are There Early Settlement Fees or Penalties?

Life changes—an inheritance, job change, or the desire to refinance—can prompt you to end a finance deal early. Some lenders impose:

• Early Settlement Charges: To recoup lost interest.
• Refinancing Penalties: If you opt to replace your current agreement with a lower-rate offer elsewhere.

Even a seemingly small penalty can cancel out the savings you would gain by clearing the balance early. If the penalty is excessive, you might find yourself locked into a situation reminiscent of car finance mis-sold practices, where the contract’s structure prevents you from leaving without prohibitive costs.

Does This Option Suit My Financial Circumstances?

From PCP with balloon payments to HP with higher monthly costs but no end-of-term lump sum, each product aligns differently with individual goals and budgets. Current interest rate trends demand extra caution:

• Your Monthly Budget: Prioritise sustainable payments that account for rising living expenses.
• Long-Term Plans: If you plan to switch cars frequently, PCP may be more flexible. If you intend to keep the vehicle long-term, HP could be more straightforward.
• Credit Health: Higher APRs often target those with lower credit scores. Make sure the interest rate accurately reflects your creditworthiness.

Questions About Fees and Commissions

Are All Potential Fees Clearly Outlined?

Small extra charges can accumulate significantly, pushing you closer to a mis-sold car finance scenario if they were never made clear:

• Admin Fees: For paperwork or digital document handling.
• Late Payment Fees: Imposed if a monthly instalment is missed.
• Option-to-Purchase Fees: Common in PCP and HP deals if you choose to own the car at the end.
• Insurance Add-Ons: Products like GAP insurance can be valuable but should be optional and clearly detailed.

For further insight, read our guide to understanding fees and commissions in car finance to ensure you are not unwittingly funnelling money into hidden costs.

Is the Dealership Earning a Commission, and Could It Affect My Rate?

A key issue in the car finance scandal is undisclosed commissions, where dealers push certain finance deals for higher profits, leading to inflated APRs.

• Transparency: Ask if your interest rate is influenced by the dealership’s commission structure.
• Comparative Quotes: Consider applying to multiple lenders to identify any suspicious discrepancies in rates.

When commissions are concealed or inadequately explained, the agreement can edge into car finance mis-sold territory. Stay vigilant, particularly if you sense pressure to accept a deal without exploring alternatives.

Questions About Vehicle Usage and Conditions

Are There Mileage Caps or Other Restrictions?

Most PCP and lease deals have mileage limits, usually between 8,000 and 12,000 miles per year. Exceeding this limit may lead to extra charges.

• Cosmetic Damage: Extra charges may apply if lenders think the car has excessive wear and tear.
• Servicing Requirements: You must use approved garages and parts to avoid additional costs.

What Happens at the End of the Agreement?

Different car finance plans come with different options at the end of the agreement, depending on the type you choose. It’s important to understand how each plan works so you can make the best decision for your situation.

At the end of a Personal Contract Purchase (PCP) agreement, you have a few options—you can make a final balloon payment to own the car, return it (if it meets mileage and condition requirements), or trade it in for a new finance deal. In contrast, a Hire Purchase (HP) agreement is more straightforward; once you’ve completed all payments, the car is yours with no extra costs, making it a simple path to ownership without a large final payment.

Consumer Rights and Protections

What if I cannot afford the repayments?

You can cancel your car finance agreement within 14 days of signing under the cooling-off period without any penalties. After this period, cancelling may result in extra charges or specific conditions. This applies to both PCP and HP agreements.

Can I Cancel the Contract (Cooling-Off Period)?

Many credit agreements secured online or by telephone come with a 14-day cooling-off period under UK consumer law. However, if you sign at a dealership, different rules may apply:

1. Duration: Confirm exactly how many days you have to cancel.
2. Cancellation Process: Ascertain whether written or electronic notice is required.
3. Fees for Backing Out: Some contracts include administrative charges if you terminate the agreement soon after signing.

If you believe your car finance was mis-sold, act quickly. You can cancel within 14 days or report the issue to the Financial Ombudsman Service. You can check our resources to learn how to recognise a mis-sold car finance agreement and your rights in car finance agreements for clear and helpful information.

Sign with Confidence or Walk Away

Car finance can make buying a car easier, but without the right knowledge, you could be mis-sold a bad deal. Hidden fees, high interest rates, and unclear rules can make car finance very expensive. Some lenders might not tell you everything, which can lead to extra costs and long payments.

To avoid falling into a car finance mis-sold situation, it’s important to stay informed and make smart decisions. Compare different finance options, carefully read the terms, and ask questions about anything you don’t understand. Make sure you know what you're signing up for, including how much you'll be paying in total and what happens at the end of the agreement.

If something doesn’t seem right, don’t hesitate to seek expert advice before you commit.