Car finance is one of the most popular ways to get a car. It can be hard to save up enough money to buy a car outright with cash as even used cars can now cost thousands of pounds. This is one of the main reasons why more drivers are choosing to finance a car today. Whilst there are so many benefits of getting a car loan, there are a few things you should consider before you apply, especially if you’ve never had finance before. The guide below looks at the top 5 factors every driver should know before taking out a car finance agreement.
How does car finance work?
There are multiple car finance agreements in the UK that you can choose from but in general, car finance is a way to fund your car purchase. You borrow a set amount from a lender or a value that is secured against a vehicle of your choice and then make monthly payments with interest until the end of an agreed term. Car finance payments can be spread over 3-5 years and can be suited to your budget. You can either obtain a loan from a reputable car finance company or at a trusted dealership. Car finance allows you to get a newer, and better car than you would when buying with cash alone as you can use the term to spread the cost.
There are so many reasons why drivers are choosing to finance their next car, from affordable monthly payments to getting both new and used cars, it can be easy to see why it’s favoured by drivers in the UK. However, there are a few factors that you should know first.
- Car finance is never guaranteed.
Whilst car finance can be more accessible than ever, it’s worth remembering that no car finance company can promise you a car finance approval. Drivers should be wary of any company offering guaranteed finance as there are usually hidden fees or high interest rates to secure the deal. There are a few limitations to getting a car on finance, for example you will need to be at least 18 years old before you could be considered as car finance is a legal agreement. Many lenders also have a maximum age limit of around 70 years old too. You will also need to undergo a credit check and an affordability assessment to see if you could afford to get a car on finance and the likelihood of you paying your loan back on time and in full.
- Credit score is important.
As mentioned above, car finance lenders will usually want to perform a credit check on you when you apply for finance. Your credit score reflects which type of borrower you are and people with good credit scores usually have a long history of managing credit and being able to meet repayment deadlines on time and in full. A low credit score can be harder to get approved with as you’re more likely to default on payments based on your history or lack of credit usage. If you’re struggling to get approved, it can be a good idea to check your credit report and spend some time either increasing your credit or building a credit history if you haven’t already done so.
- Set an accurate budget.
Budgeting for car finance is really important and it’s essential that you can afford to meet your repayment deadlines. It’s a common rule that you should not spend more than 10% of your income on car finance to help make sure you can afford each and every payment. Lenders will usually ask you how much you earn and what your current employment status is. You will then usually have to provide bank statements or payslips to verify your income. If you fail to meet your car finance payments, the lender can have the right to take the car off you if it’s a secured loan and it can seriously affect your ability to get any sort of loan or finance in the future.
- You may be better suited to one form of car finance over others.
In the UK, there are 3 main types of car finance agreement that tends to be the most popular. Each car finance agreement is different and depending on what you want from your deal, you could be better suited to one form of finance over others. You could use a free hire purchase calculator to get an idea of how much your payments could be a month. When compared with PCP deals, HP usually has higher monthly payments as you spread the full value of your chosen car into equal payments. PCP on the other hand can be great if you’re not bothered about owning the car and want more flexibility. A personal loan could be the most cost-effective but is usually reserved for those with excellent credit scores. It can be worth exploring each in more detail to see which is the best for your circumstances.
- Compare both new and used car finance.
When car finance was first introduced, it was only really available on brand new cars. This made sense as they tend to have a higher purchase price than used cars and the finance was available at the dealer. Nowadays, you can finance both new and used cars and financing a second-hand car can help to make your money go even further. Depending on what you want from your deal, it can be beneficial to compare monthly payments on both new and used cars to see which fits in best with your budget.