Navigating the world of car finance can be confusing, especially if you’re taking out finance on your first car.
However, car finance doesn’t have to be a mind trap! There are many ways in which you can make sure you get the best deal for your financial circumstances.
What is car finance?
Car finance is a legal agreement between you and a finance lender. Car finance lenders give you the money to pay for a car and you will meet their repayment schedule to the end of an agreed term with added interest.
Most car finance deals will require you to pass a credit check before you are accepted for finance and your rate of interest is set by your finance lender. There are a few different types of car finance which can also be obtained by different means. Let’s explore how you can get the best finance deal for you.
1. Explore different finance options
In the UK, there are 3 main finance options which are the most popular. This includes a personal loan option, personal contract purchase and hire purchase agreements.
Personal loan
A personal loan is one of the most straightforward types of finance. You can obtain a personal loan from banks, building societies and online comparison sites. A personal loan can be used to buy pretty much anything.
You would apply for a certain amount and then if approved, you can then get a car from any dealership or private seller using the money deposited into your bank account. You will agree to pay back your loan in monthly instalments with added interest, usually over 1-7 years. You own the car instantly so you can choose to do what you want with it.
Hire Purchase
A Hire Purchase agreement is similar to a personal loan, but the loan is secured against the car instead. This means that the lender will own the car until the final payment is made. If you fail to meet your repayment deadlines, the lender has the right to take the car off you.
Usually within a Hire Purchase agreement, a deposit is required and then monthly payments with interest is followed to pay off the full amount of the car. You can get accepted for Hire purchase car finance from car dealerships and online car finance brokers. Hire purchase agreements are usually spread over 1 to 5 years.
Personal Contract Purchase
PCP deals are similar to Hire Purchase but usually have lower monthly payments. This is because the deal isn’t structured to pay off the full amount of the car but part of it. Until the final balloon payment is made, the lender will own the car.
The balloon payment tends to be quite large at the end of your agreement, but you can choose to refinance it. Alternatively, at the end of your agreement you can hand the car back to the car dealer and walk away or you can use the retail value of the car on another PCP deal with another car.
2. Use a car finance broker
Many people are still under the misconception that a good car finance deal can only be offered at a car dealership. You see a used car you like on the forecourt and then apply for finance within the dealership. But what if you got the best finance deal before you found your perfect car? This is how a car finance broker works. A car finance broker is the middleman between you and the lender.
It completely fee to use and brokers only earn their commission from the lenders, not from customers. You would apply online with a finance broker, and they match you up with the best finance deal from the most suitable car finance lender. They then work with you to get the car you want within your finance budget!
3. Increase your credit score
As mentioned, for many types of car finance, you will usually have to pass a credit check. Having a good credit score can mean you have access to better deals. If you are worried about a low credit score, there are a few easy ways in which you can increase your credit score before applying for finance.
Having a bad credit score usually means that you have had trouble meeting your repayment deadlines in the past and you are seen as more of a risk to finance lenders.
4. Save up for a deposit
Having a deposit for car finance can be really beneficial and increase your chances of getting accepted for finance and also getting a better deal. Having a deposit saved up can show lenders that you are financially responsible.
It also means that you don’t have to borrow as much from lenders and can reduce your monthly payments. If you don’t have a deposit for finance and need a car as soon as possible, there are many affordable no deposit car finance deals available.
5. Part exchange your current vehicle
Not considering your current car is a big car finance mistake! If you already have a car, you can get a better deal by part exchanging your current car. Having a part exchange can help you pay for your next car and lower your monthly payments.
Having a part exchange is beneficial for both you and the car dealer or broker as they take the car off your hands, take the price of your part exchange off your total cost and the dealer can sell the car to another customer.
There are also options if your current car still has outstanding finance. If the value of the car is worth more than your outstanding finance, lenders can settle your finance for you.
