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Debunking car finance myths – what do you really need to know?

At Zopa, we believe all consumers should get a fair deal as standard. It’s your money after all, so why shouldn’t you get the most out of it? However, this isn’t the case with all financial providers. We want people to feel good about their money, so we believe in shining a spotlight on unfair practices and providing you with information to help make the right decisions when borrowing.

In light of the FCA’s recent report into excessive motor finance costs, our latest research explores how UK adults are increasingly confused by varying finance options on the market.

Car finance confusion

We asked UK consumers[1] to pick the cheapest deal from five common car finance options and a staggering 9 in 10 adults were unable to choose the lowest cost option. Additionally, we found that 68% of buyers accepted the first car finance deal offered to them without shopping around.

The true impact of not understanding car finance options came to light when we calculated that car buyers could save themselves nearly £10,000[2] over the course of their lifetime by understanding how to pick the best finance deal.

So how do you make sure that you don’t fall into the confusion trap? All this week we’ll be posting a series of myths across our social media channels to try and help you feel empowered and prepared the next time you need to consider car finance. In this blog, we’ve explored each of these myths in more detail to give you all the information you need.

Myth #1: All car finance options are basically the same

This really isn’t true.

You can buy a car using a range of different car finance products, from Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Contract Hire (PCH) or an unsecured personal loan. The table below shows just some of the options that you can find on the market and highlights just how complicated it is to pick the cheapest option from what you’d see advertised:

How much the finance costs will depend on which option you choose and how good you are with managing credit. It’s also worth knowing that some of the options are structured so you own your car at the end of your payment term, such as HP. However, for others you’ll need to make additional payments to own the car.

Myth #2: A 12% loan always costs the same

If you pick a flat rate loan, the total cost will be a lot more.

With a flat rate loan, you pay interest on the whole amount that you borrowed at the beginning of the loan, which means the interest rate is often nearly double what you’ll pay if you’d taken out a similar looking loan with an APR rate. With APR the interest is calculated based on how much you have left to repay, meaning it’ll reduce throughout your loan term. Many car finance providers or dealerships still use flat rate loans rather than APR to make loans appear cheaper than they are.

Take a look at the table above and you’ll see that there’s a significant difference of £2,751 between option 2 (APR 12%) and option 4 (flat rate 12%). They may look similar in the way that they are advertised, but knowing the difference could save you a considerable amount of money.

Myth #3: The rate you see advertised is the rate you get

The rate that you might see advertised on the side of the car or on a website is the headline rate – this rate is given to 51% of borrowers but it means 49% of applicants will receive a higher rate when they come to apply.

The majority of finance providers in the UK won’t show you the actual rate you’ll be offered until you’ve gone through the application process

However, as with a Zopa personal loan, the rate that you’re offered with us is very much unique to you and your personal circumstances and we’ll show you that rate before you apply.

The rate you’ll be offered will depend on your individual circumstances and every lender will look at a variety of different things to ensure they give you a rate that is reflective of your ability to make monthly repayments.

At Zopa, a few of the factors that we look at include:

  • Your existing level of unsecured debt
  • The amount of information in your credit file
  • The affordability of the loan in your financial circumstances
  • Evidence that you’ve paid off credit on time in the past
  • Your credit score, as reported by Transunion and Equifax
  • Whether you’ve applied for a Zopa loan in the past six months


These are the factors that Zopa explores, but you should take these into consideration when applying for a loan with any provider.

Myth #4: It doesn’t hurt to see what the finance deal would cost

While shopping around can help you find the best deal, you also need to be aware that when you check your loan rate with certain providers, it could leave a mark on your credit file.

Some loan providers mark applicants’ credit records in advance of them receiving a personalised rate. If you don’t accept the first offer and the provider does leave a hard mark on your credit score, this will make the second quote more expensive. At Zopa, we offer real rates, letting customers know the actual rate they’ll get, and whether they’ll be approved for the loan, before they apply, all without leaving a mark on their credit score.

Myth #5: You have to take the finance deal the dealership is offering you

In our research, we found that 68% of people took the first finance deal offered to them at the dealership. With 90% of people having trouble identifying the best available deal, it’s unsurprising that many people will go for the first option they’re offered. But if you shop around, understand the ins and outs of each option, and do your research before applying, the average buyer could save themselves £10,0002 over the course of a lifetime. For example, you could make a saving by coming straight to Zopa first to arrange your finance. Zopa car finance loans are based on a representative 9.5% APR.

There are a number of different things that you have to consider when purchasing your next car. If you are looking to use finance to purchase your next car, you should remember that shopping around with providers that don’t mark your credit score initially is key, you’re not alone in your confusion and you don’t need to take the first option offered to you.


[1] Omnibus research carried out amongst 2,000 UK adults on 19 July 2019.

[2] Zopa analysis of The Society of Motor Manufacturers and Traders (SMMT) data. 7.9 million used cars were sold in 2018, around 3 times the 2.36 million new cars registered. This implies that each car has around four owners before it is scrapped at 14 years, with average length of ownership at 3.5 years. Using the average length of car ownership, from the age of 18 to 70 we estimate that a British adult would own 15 cars. In 2018, 26% of private cars were bought on finance (new and used), suggesting that UK adults will buy at least four cars on finance in their lifetime. Our research found a £2,750 gap between the most affordable car finance deal and the most expensive, for the same vehicle – which works out at £11,000.