New research from Zopa shows that consumers are becoming increasingly confused when picking the best car finance option to fund their purchase. Nearly half (47%) of those who have recently bought a car with finance can’t identify what type of car finance deal they actually signed up for.

Zopa’s research estimates that the average car buyer could save up to £11,000 over the course of their lifetime just by working out the best finance deal.

However, when it comes to working out the best available option, many find it impossible to do so. The research asked 2,000 UK consumers to pick out the cheapest deal from five common car finance options (listed below). The vast majority – nine in 10 – were unable to choose the lowest cost option.

The study also revealed that over two-thirds of UK adults (68%) have accepted the first car finance deal offered to them at a dealership, without shopping around for a better deal. A further 48% of people taking out car finance at a dealership admitted to finding the whole process stressful.

These complex finance deals, baffling jargon, stressful dealership experiences and difficulties faced comparing prices are leaving Brits confused and paying more than they need to; with car buyers admitting they don’t understand the language (19%), or the finance options explained to them (16%).

The study included a range of common options available to people looking to purchase a standard hatchback. These included hire purchase loans, PCP (Personal Contract Purchase) deals, and personal loans, with different rates, different deposit amounts, and time periods.

Choosing the best car finance deal for a 2017 Ford Focus priced at £12,000

2017 Ford Focus priced at £12,000
Deposit Finance Rate Borrowing Term Monthly cost Total cost
Option 1 £0 Personal loan APR – 10% £12,000 5 years £252 £15,145
Option 2 £4,000 Hire purchase APR – 12% £8,000 5 years £242 £14,529
Option 3 £1,500 PCP APR – 11% £10,500 4 years £190 £15,283
Option 4 £1,000 Hire purchase Flat rate – 12% £11,000 4 years £360 £17,280
Option 5 £3,000 part exchange PCP APR – 14% £9,000 3 years £204 £14,750

Finding the cheapest option isn’t easy

  • Only one in 10 can identify cheapest option: The cheapest option for people looking to buy a car was Option 2 – a hire purchase loan at 12% APR over 5 years with a deposit of £4,000 – amounting to £14,530 at the end of the term. However only 10 per cent of UK adults correctly identified this option.
  • 11% believe most expensive is the cheapest: In contrast, Option 4 – a flat rate hire purchase loan at 12% over 4 years and a deposit of £1,000 – was the most expensive at £17,280, although 11 per cent believed this to be the most affordable. This was much more expensive because it is a flat rate loan, which means people pay interest on the amount that they borrowed at the beginning of the loan and not on the money they still owe – making the interest rate in this example nearly 23%. Many car finance providers or dealerships still use flat rate loans rather than APR to make loans appear cheaper than they are.
  • 3 in 10 chose the third best option: Option 1 was a personal loan of £12,000 over 5 years at an APR of 10% – not secured on the car, nor with an initial deposit
  • Option 3 – a PCP loan at 11% APR over 4 years with a £1,500 deposit – had the cheapest monthly cost at £190 per month but was the second most expensive at an overall cost of £15,285, including a balloon payment of £4,630. Car buyers using PCP and looking to own the car need to be mindful that they will pay a one-off lumpsum at the end of the finance deal.

In March, the Financial Conduct Authority (FCA) found that people using finance to buy a car may have been overcharged on their interest payments by £1,000 or more because of the way lenders pay commissions to motor dealers, with the FCA set to further investigate how commission works in the industry.

To complement its study, Zopa commissioned research amongst people who had bought a car with finance recently to get an understanding of the issues people face.

Most concerningly, it found that 26% of consumers had accepted a higher APR on a car finance deal than they thought they could afford, with the majority of those people (50%) using it to buy the car of their dreams. Another 26% of people had done so where they needed a car urgently.

Zopa research also found that 48% of people taking out car finance at a dealership found the whole process stressful. Wrapped into this is the fact that many dealerships still leave unnecessary hard marks on a car buyer’s credit file before they’ve received a personalised quote – impacting their credit score in a way that is likely to reduce the chance that they will get credit from other lenders.

Most worrying is that so few consumers are aware that the industry is doing this, with two in three people (69%) taking out car finance in the last five years having no idea whether they received a hard credit check when they first inquired about a car.

Zopa says that while today over 90% of secured car finance is arranged at dealerships, and with the FCA set to rule on how commission works in the industry, customers do have alternative options which can help them avoid much of the stress, confusion, and uncertainty that’s common in the market today.

For instance, car buyers can arrange their secured finance online before choosing their car. At Zopa, customers can be conditionally approved for hire purchase finance at a guaranteed interest rate, with no hard mark on their credit file until the point of application, and then choose a car whilst having the peace of mind that Zopa will background check the car and the dealer, and sort out the paperwork and money with the dealership.

Didier Baclin, Zopa’s Chief Product Officer, said “Buying a car is a major financial decision, yet it’s so complex it’s nearly impossible for people to work out the best finance option.”

“In the wake of the FCA’s report into the car finance market, Zopa wants to provide a better alternative for people looking to buy a car, doing away with the complex finance deals and baffling jargon. Our aim is to help create a fairer and more transparent car market so that people can take out car finance knowing what they’re signing up for and whether its right for them.”