More people than ever are choosing to finance or lease their next vehicle. Long gone are the days where cash was king and now, getting a car has never been more expensive. Many people need a car to get around but can’t afford to pay for one outright, this is where car finance comes into play. Car finance allows you to spread the cost of your car into monthly payments over a number of years. This can be a good way to get a newer car and pay for it in instalments. Here are some factors you can consider to get the best car finance deal for your circumstances before you start applying. The guide below has been designed to look at how to get a car on finance and how to lower your car finance payments.
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How does car finance work?
Car finance is the process of borrowing money to fund a car purchase. There are different types of car finance agreement to choose from and you may be suited to one over others. You usually borrow money from a trusted car finance lender and agree to pay it back over a number of years. All payments must be made on time and in full, if not, it can lead to more serious financial implications and risk the car being taken off you if it is a secured loan. It’s worth remembering that you will need to get accepted first before you can get a car on finance and it is up to the lenders criteria and their final decision whether they would like to offer you a car finance deal or not.
How to get the best car finance deal for your circumstances:
Each individual who applies for car finance will receive a different car finance deal. There are a few factors you can consider before you start applying to help get you the best finance agreement for your personal circumstances. Factors such as the type of car finance agreement you choose, your current credit score and the interest rate you receive can affect how much your deal will cost a month.
1. Types of car finance agreement
If you’re looking to get car finance, you may be wondering which type of agreement is best suited to you. In the UK, there are 3 three agreements that tend to be most popular. They are a personal loan, a PCP car finance deal, and a hire purchase agreement. Each has similar principles, where you borrow a set amount and pay it back over a number of years, but they all have their own individual structure.
A personal loan can be one of the most cost-effective ways to finance a car. You request to borrow a set amount from a lender and if accepted, you get the money deposited into your bank account, usually the same day. You can then use this amount to go and buy a car from anywhere you like and will be the automatic legal owner of the car. You then make monthly payments to the agreed term until the deal has ended. If you choose to sell the car before the deal has ended, you will still need to make payments until the agreement finishes.
Hire purchase is a secured loan which means the lender owns the car throughout the agreement until the final option to purchase fee has been paid and you will then own the car. Hire purchase spreads the cost of your chosen car into equal monthly payments with added interest, usually over 3-5 years. HP can be suited to those with lower credit scores because if you fail to repay, the lender has the right to take the car off you. It’s important that you never take out a car finance deal that you can afford to pay back as it can seriously impact your financial life.
Personal Contract Purchase is a flexible way to get a car on finance. PCP car deals are a form of HP but instead of covering the cost of your car, you make monthly payments to pay off the depreciation whilst you sue the car. This means you can benefit from low monthly payments than other options. If you want to keep the car at the end of the deal, you will need to pay the large balloon payment. Or you can choose to hand the car back to the dealership at the end of the deal.
2. Compare APRs
When you get a car on finance, you will need to pay interest on top of your loan. There are 0% interest finance deals, but they are usually reserved for people with good credit and are available from manufacturers on brand new cars. Where possible, you should try to get the lowest APR possible. Low-interest car finance deals mean you don’t pay back as much overall and can help to make your agreement cheaper. When shopping around car finance, you should compare APRs as this reflects the true cost of borrowing as it factors in any additional fees you need to pay.
3. Have a good credit score
Lenders will usually require you to undergo a credit check before you can get approved for car finance. Your credit score and credit report give the lender an insight into how you handle your finances and if you could be trusted to pay back your loan based on your past behaviour. The best car finance rates are usually reserved for people with good credit. This sis because they usually have low levels of debt, make payments on time and in full and handle their credit responsibly. If you find yourself with a low credit score or no credit history, you could consider rebuilding your score before you start applying to help get you a cheaper deal.
4. Choose a shorter term
When you take out a car finance deal, you will need to choose what term you would like to spread the payments over. It can be tempting to choose a longer loan term as this reduces your monthly payments, but it means you will take longer to pay it off. Choosing a longer term also increases the amount of interest you pay which can make your deal more expensive than it needs to be.
5. Put down a larger deposit
For car finance deals such as hire purchase, you may be required to put down a 10% deposit. It can also be beneficial to out in as much as you can as a down payment. A larger deposit means that you are reducing your loan amount and don’t have to borrow as much from the lender. If you’re struggling to get approved, it can help your case as it puts you in a better financial position with the lender.