Car Finance and Insurance: Everything You Need to Know

When taking out car finance to buy a brand new or used car, you can very often be offered a package deal that includes insurance. But, is this really the best deal you can get or should you shop around for insurance separately?

To help you decide this and more, we’ve put together this FAQs guide about car finance and insurance.

In this FAQ guide:

Does a new car come with insurance?

Can you get a car on finance with insurance included?

Is insurance higher if you finance a car?

How much is insurance on a financed car?

What is the best car finance option?

What credit rating do you need for car finance?

Does car leasing come with insurance?

Is it worth buying a car on finance?

How to get the best deal on car insurance

Does a new car come with insurance?

Yes, if it’s a brand new car. When you buy a brand new car from a dealership, your purchase price will very often include free temporary car insurance. This temporary insurance policy will provide you with cover for up to 7 days from the date of purchase to allow you ample time to arrange your own insurance.

Before rolling off the forecourt, you must make sure that your car is insured to avoid a £300 fine and points on your licence. To be 100% certain you are insured to drive your new car, you can quickly and easily check you’re insured to drive by using the Motor Insurance Database’s free, online service: askMID.

If you’re buying a new used car, very often, temporary insurance cover is not included and you must arrange cover for the date and time you purchase and pick up your new car.

If you’re part-exchanging or separately selling your old car, you should tell your insurer and either amend your existing policy to provide cover for your new car or cancel it and take out new insurance.

Bear in mind that if you amend your existing policy there will usually be an administration fee or if you cancel it, a cancellation fee. In addition, if you cancel your insurance early you will lose your no claims discount entitlement for that incomplete year.

So you should take these factors into account when deciding what to do about insurance and when comparing quotes with other insurers.

You might like: Cancelling your car insurance early - A guide

Can you get a car on finance with insurance included?

Yes, you can get cars on finance with insurance included, but not every finance deal will include insurance as standard so you should never assume this is the case.

Sometimes, dealers will even offer insurance for ‘free’, but check the small print of your finance deal as very often, you end up paying more for the actual car. It’s always best to compare deals and quotes for car insurance as you can save hundreds of pounds.

If the free insurance is just temporary 7-day insurance cover then you need to make sure you arrange insurance before the 7 days expire.

Having car finance with insurance means you’ll have one consolidated monthly payment, so if simplifying your car payments in this way appeals to you, bear in mind that this isn’t always the cheapest option.

In addition to insurance, some car finance options can also include tax and servicing as part of a package deal. Again, look at comparables and check out the small print before settling on a deal as the so-called savings are usually absorbed by other, hidden costs.

Is insurance higher if you finance a car?

Yes, insurance can be higher if you finance a car on hire purchase (HP), personal contract purchase (PCP) or for leasing a car (PCH) but if you take out an unsecured personal loan, funding your car purchase in this way should not affect your insurance premiums as you will own the car outright from the start.

How much is insurance on a financed car?

There is no set amount for insurance on a financed car. The cost of cover will be influenced by:

• Demographics - where you live, your age and even certain medical conditions can affect insurance costs.
• Driving record - points on your Licence or unspent driving convictions will increase your premiums.
• A car’s make and model - the more expensive or powerful a car is, the higher the premiums will be.
• The car’s age - if you buy a brand new car on finance, you may wish to consider taking out specialist guaranteed asset protection (GAP) insurance to cover the difference (bridge the gap) between what the car may be worth when you make a claim and the amount you have left to pay on the finance agreement.
• Type of finance agreement - HP or PCP agreements tend to increase insurance costs as you do not own the car until the agreement ends (PCP gives you three flexible options at the end).

Read more: The best way to finance a new car

What is the best car finance option?

The best and cheapest way to finance buying a car is to pay with cash (obvs) or with a personal loan. HP or PCP agreements are the second-best options for financing a car.

Check out our comparison table below that provides a brief pros and cons summary of each type of car finance arrangement.

Car Finance Options: Pros and Cons

For more detailed information, check out our guide: The best way to finance a new car.

What credit rating do you need for car finance?

To get the best car finance deals and avoid high APRS, ideally, you should have a good to excellent credit score and history. That said, even if you have a poor credit rating, there are specialist lenders who may offer you finance, but of course, these types of loans will attract much higher APRs and are a lot more costly in the long-run.

You should always check you can actually afford the monthly payments before committing to any type of loan as if you do not keep up the repayments and the loan isn’t a personal one, you could have your car repossessed and your credit rating lowered.

A ‘good’ credit score differs between credit reference agencies and different car finance companies use different credit reference agencies who use different scoring systems.

To check if your score is ‘good’ with all 4 main credit reference agencies in the UK, in one fail swoop, head over to Checkmyfile who provide free credit information, from all 4 credit reference agencies.

You might like: What checks are done for car finance?

Does car leasing come with insurance?

This does not usually come as standard, but it can be offered with some car leasing agreements (also known as personal contract hire - PCH). If insurance is included in the deal, it will usually be specifically stated as being so, but usually, it is your own responsibility to arrange insurance for a leased car.

Some car leasing companies will require you to take out fully comprehensive car insurance as part of the terms of their leasing agreement with you.

For more detailed information, check out our guide: Car leasing with insurance: is it worth it?

Is it worth buying a car on finance?

If you have a good credit score, are a low-risk driver with no unspent driving convictions and have spare monthly disposable income, but you can’t afford to buy a car outright, then car finance is probably a good idea.

The type of finance options available to you will depend on your circumstances and requirements. If you finance a car under a hire purchase (HP), personal contract purchase (PCP) or a leasing agreement (PCH) then a deposit is usually payable. The interest rate on these types of agreements is usually higher than if you take out a personal loan to buy a car outright.  The insurance can also be higher for HP, PCP or PCH.

For more info, take a look at our Car Finance FAQs.

How to get the best deal on car insurance

To always get the very best deal on car insurance, we recommend avoiding any ‘deals’ where insurance is included with finance and you shop around and compare quotes.

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• 15 tips for reducing your car running costs

• 13 of the best and cheapest cars to insure in the UK

• How to save money on car insurance