Car finance for first-time drivers makes it realistic to get a good set of wheels without the massive upfront costs. It means you can swerve the dodgy second-hand car dealerships, breakdowns at the side of the road and ongoing costs for repairing an old banger.
It’s more common than you might think too. From May 2023-2024, more than two million cars were bought on finance in the UK. New drivers are no exception, whether you’re a teenager passing for the first time or an adult getting your licence later in life. Below, we’ll look at how you can get a new or used car on finance – including the challenges, different options and tips to improve your chances.
How do first-time drivers get car finance?
While drivers can pass their test at any stage in life, lots of people get straight into it from the youngest possible age – 17. Unfortunately, the most eager teenagers who learn to drive quickly and pass for the first time won’t be able to apply for finance just yet, as the minimum age is 18.
You might think you can get a parent to apply for finance on your behalf. However, this can be classed as fraud, as discussed in our article on finance for children.
From 18, all drivers can apply for car finance. You’ll need:
Admittedly, young first-time drivers might struggle to get car finance from mainstream lenders because of limited or no credit history (more on this below). Fortunately, some financial institutions see past this – offering car finance specifically for younger drivers. As well as a more lenient approach to credit history, you can expect lower deposits and more flexible terms.
Why is car finance difficult to get for young first-time drivers?
So, you’re over 18 and ready to finance a car. There’s just one small problem – credit history. Even though you’re legally classed as an adult, you won’t have a credit profile that puts you on a par with your elders just yet. That’s simply because you’ve not been working, paying bills and making other repayments for several years – you’ve not had the time just yet!
Credit files are one of the main ways lenders check your eligibility and trustworthiness, so having limited or no credit history is obviously a stumbling block. It makes lenders cautious, because they can’t see evidence of you borrowing and paying back money to other companies.
That’s not the only risk factor either. Young drivers are seen as higher-risk borrowers due to their lack of driving experience. Drivers between the ages of 17 and 24 are over-represented in reported road accidents, compared to those aged 25 and above. This can put off lenders when the car you’re driving is the only asset securing your loan.
On top of that, there’s the income issue. When you’re on the bottom rung of the career ladder, your wage is likely to be lower – not to mention your job being less stable. Young people have the shortest tenures at jobs with 37.7% of 18-19-year-olds spending less than 6 months with an employer on average.
Types of car finance for first-time drivers
When shopping for car finance, you’ll see a variety of different options. They can be a little hard to decipher at first, which is why we’ve put together a quick and easy guide covering your options.
Personal contract purchase (PCP)
PCP contracts are one of the most widely used car finance options in the UK. Benefits include low monthly repayments and lots of flexibility. You start with a cash deposit, then repay the rest of the loan in fixed monthly payments, plus interest. Instead of purchasing the car, your repayments cover the cost of depreciation.
Because of this, most PCP loans have mileage caps to limit depreciation and minimise wear and tear. When your contract ends, you can choose to return the car and start a new contract on a brand-new vehicle, or you can make a final ‘balloon payment’ and own the car outright.
Hire purchase (HP)
HP loans generally start with a 10% deposit, followed by monthly instalments, plus interest. Unlike PCP contracts, your fixed monthly payments are put towards the total value of the car, not depreciation. This means you don’t have mileage caps and you’re the legal owner of the car at the end of the contract. No balloon payment necessary. You can either sell the car and start a new HP loan or keep it with no ongoing payments.
Personal contract hire (PCH)
Unlike PCP and HP loans that give you the option to own the car at the end of your contract, PCH agreements adopt a lease model. Your repayments aren’t put towards depreciation or the total cost of the car. Instead, you’re simply renting a vehicle for the duration of your contract.
This gives you more flexibility as you can switch cars every few years. It will also cost a bit less given that you’re not paying off the cost of the vehicle itself. However, it does mean that you’ll have mileage limits like a PCP deal.
Traditional personal loans
Another option is to get a personal loan from a bank or credit union. In this case, your loan isn’t tied to the car, so there won’t be any mileage limits or other restrictions. You’ll purchase the vehicle outright then pay off your loan separately.
However, because there’s no asset (the vehicle) to secure the loan, it can be harder to get approved. You’ll still have the challenges with your credit history, income and collision risk, without the collateral to reduce risk for the lender.
Steps to apply for car finance as a first-time driver
If you’re applying for car finance as a first-time driver, there are some steps you should take to make the process easier and avoid any hiccups.
Shopping around
You’ve probably heard it a thousand times before, but it always pays to shop around for the best deals and terms. Because of the risk factors we’ve mentioned above, car finance for first-time drivers might come with a higher interest rate. You can minimise the impact of this by comparing different lenders or using a broker to find the best deal for you.
Checking eligibility
You should always check your eligibility before applying with different lenders. This includes their own criteria as well as your credit score. Applying when you’re not eligible can have an impact on your credit score, as lenders might perform a hard credit search before rejecting your application. These searches leave a mark on your credit file, so having lots of them isn’t a good look.
Choosing the right car
Make sure you pick a car that fits within your budget too. If you’re applying for finance before searching for a car, lenders will give you a maximum loan as part of your terms. If you choose a car that doesn’t fit, you’ll need to pay a larger deposit to make up the difference.
Check terms and conditions
Finally, always check the terms and conditions before entering any finance deal. This will ensure you avoid any unexpected fees for things like wear and tear, excess mileage or late payments.
How to improve your chances of getting approved for car finance
There are a few ways to improve your chances of success when applying for first-time car finance.
Build your credit score
While you won’t have a long track record of credit for lenders to look at, you can still improve your score by being responsible with money. Pay bills on time, avoid accumulating too much debt and don’t make applications on a whim. For more tips, check out our article on improving your credit score.
Make a larger deposit
We mentioned the bank of Mum and Dad earlier. While it might not cover the cost of a car in full, they might be able to help with a larger deposit. Or perhaps you’ve got a bit of money saved up yourself.
The more money you put down up front, the less risk there is for lenders. It reduces the amount you need to borrow, which also reduces your monthly payments to improve affordability.
Use a guarantor
A guarantor is someone who agrees to make repayments to your lender if you fail to make them. It’s another layer of security for lenders which makes your application more appealing. Guarantor loans are a popular option for first-time drivers, if you have a parent, sibling or friend who’s willing to back you up.
Pros and cons of financing your first car
Below, we’ll look at the pros and cons of car financing for first-time buyers.
Pros:
Affordable monthly payments
Car finance for first-time buyers is simply a clever way to stretch out your payments over a pre-set timeframe. There’s no need to fork out thousands of pounds up front – which most first-time drivers don’t have. Instead, you can break the cost of your car down into manageable monthly payments.
Access to better cars
Many first-time buyers think they’re limited by a cash budget when shopping for a car. The truth is most new private cars in the UK are purchased using car finance. It’s a great way to boost your budget and unlock access to more desirable models. With car finance, you can afford a higher-end vehicle or a new model without the need for a huge deposit.
Building your credit history
Credit scores have to be earned, which can make things difficult for Brits without a solid borrowing history. If you have a limited financial paper trail, car finance for first-time buyers can be a great way to improve your credit score and prove to lenders that you’re a responsible borrower. Moving forward, this will help you secure other loans like a house mortgage.
Cons:
Interest and fees
It’s worth noting that car finance agreements include interest and additional fees, making the overall cost higher than the original vehicle price.
Long-term commitment
Car finance is a long-term financial commitment, which can be restrictive, especially if your financial situation changes. You should consider whether you’ll be changing jobs, moving house or making any other big purchases over the length of your repayment term.
Risk of repossession
If you fail to meet your monthly payments, the lender may repossess your car, leaving you without a vehicle. Make sure you factor in other running costs like insurance and fuel as well as general living costs to avoid overspending.
What are the best cars for first-time drivers?
There are four main factors to consider when selecting a car to finance as a first-time driver…
Insurance
The average young person pays double for their car insurance, compared to people over 35. So, you’ll want a car with low insurance premiums to keep costs to a minimum.
Fuel economy
The cost of petrol and diesel can soon stack up, so it’s best to choose an economical car to save money on running costs.
Reliability
Having a reliable car will reduce maintenance and repair costs. According to the What Car? Reliability Survey, the top contenders are Lexus, Toyota, Mini, Suzuki, Mitsubishi, Honda, Hyundai and Kia.
Affordability
Finally, you’ll want to balance all of this with your budget. Here are some of the most affordable cars for first-time drivers based on all of the above:
- Volkswagen Polo
- Hyundai i10
- SEAT Ibiza
- Skoda Fabia
- Fiat Panda
Is car finance right for you as a first-time driver?
Car finance for first-time drivers has its challenges – whether it’s limited credit history, low or unstable income, or just lender caution in general. With specialist lenders, it’s possible for most first-time drivers to find a deal that suits their needs. In doing so, you can spread the cost of your next car and maximise your budget to buy something that’s more reliable.
An important part of the process is choosing between the different car finance options such as PCP, HP, leasing and personal loans. You should also think carefully about your budget, affordability and long-term financial health before making a decision.
Are You a First-Time Driver Looking for Car Finance?
If you want to get a better idea of how much car finance will cost, try our car finance calculator. Simply enter the amount you need to borrow along with your preferred repayment term and a rough idea of your credit rating, then get a handy estimate of the monthly repayments.
Need more personalised support? You can also contact our Car Credit Specialists on 01246 458 810 or by emailing enquiries@mycarcredit.co.uk.
Frequently asked questions
Can I get car finance as a first-time driver?
As long as you’re over 18, it’s entirely possible to get finance for first-time car buyers. You may need to compare deals from specialist lenders because of your limited credit history or consider a guarantor loan to strengthen your application.
What is the minimum age to get car finance?
The minimum age for car finance is 18 in the UK.
What types of car finance are available to first-time drivers?
Once you’re 18, you can choose between several types of car finance for first-time drivers, including personal contract purchase (PCP), hire purchase (HP), personal contract hire (PCH) and personal loans from a bank or credit union.
Will car finance be more expensive for first-time drivers?
Car financing for first-time buyers can be more expensive because of the increased risk for lenders – due to limited credit history, less stable income and a higher risk of road traffic incidents. As a result, lenders will often charge higher interest rates for first-time drivers to make the reward worth the risk.
Can a first-time driver get car finance with a guarantor?
Using a guarantor can increase the chance of approval for first-time drivers, but you still need to be 18+ to apply. If you make all your payments on time, your guarantor will simply be a name on your application. However, they will have to make payments on your behalf if anything is missed.
Is it better to buy a car outright or use finance as a first-time driver?
This depends on your personal preferences and financial circumstances. Buying a car outright means you’ll pay less overall, without any interest or other fees. However, it requires a large up-front payment that most first-time drivers can’t afford. Finance provides more flexibility by spreading the cost, though you do have to pay interest and there may be mileage limits and other terms depending on your agreement.
What should I consider before applying for car finance as a first-time driver?
You should consider the different car finance options – PCP, HP, leasing and traditional loans – as well as the option to buy outright. Take into account your up-front budget, monthly affordability and long-term financial health.
