For most of us, buying a car outright isn’t possible; whether that’s new or second-hand, a decent car will cost a good few thousand pounds…and then some.
While it’s easy to opt for the finance offered on a new or used car at the dealership, you could get a better APR rate by using a personal loan – depending on your credit score and circumstances.
But how do you go about getting a car loan? Here’s our step-by-step guide to applying for a car loan.
Step-by-step guide to applying for a car loan
- Decide the amount you want to spend – if you’re looking at a car of say £16,000 and can put some money towards it (20% is a good amount), then £3,000 of your own money means you’ll need to borrow £13,000.It’s always a good idea to add some of your own money when it comes to buying a new or used vehicle; this way, you can help offset some of the depreciation, so if you need to sell the car before the loan ends, you should brake even or maybe slightly in profit.
- Decide on how long you want the loan– you can pay off a loan as quickly as you like, but you’ll pay more interest the shorter the loan. Borrowing anything less than £5-6k will attract a higher APR too, so it’s worth keeping an eye on the interest as borrowing more can sometimes mean you’ll pay back less.A good ballpark figure for a second-hand car loan is five years. So if the car you’re buying is 2 – 3 years old at the time, add another five years, and it’s probably about time you sell it before it becomes a maintenance nightmare.
- Apply for a loan – you want to make sure you have a good Credit Score for a car loan, as a hard credit check will be performed later on in the application process.You only want to apply for a loan with one provider; doing so with many can mean multiple credit checks on your file, which will bump up the APR% interest in near real-time. What can start out to be an affordable loan can soon become ridiculously expensive if you keep getting credit checked.
- Wait for approval – this used to take a couple of days, but you’ll likely hear back about your loan within a few hours with most providers. It’s actually frighteningly easy to borrow large amounts of money these days!It’s also worth seeing what offers your bank has; they often ‘pre-approve’ you for a loan as they already know you. This guarantees you’ll be offered a loan at that rate, it might not always be a good rate though so shop around.
- Purchase the car – go back to the dealership and pay for the car in full. Depending on the amount, you can usually pay via a BACS transfer or even a debit card.
- Pay back the loan – once your shiny new car is sitting on the drive and you’re happy with your new four-wheeled toy, it’s time to make the repayments. They’ll be set up when you get the loan and will continue on whatever day of the month you decide until the whole amount is paid off.Don’t miss a payment, as this can lead to a black mark on your credit score, which will affect you getting finance, such as a credit card or another loan in the future.
It’s worth ensuring that the account your loan payments are coming out of has a decent overdraft, so even if your money is low, the loan payment will still go out, and you won’t be penalised.You can also settle the loan early if you need to, either by selling the vehicle or if you happen to come into some money. There’s usually a small fee for doing this as the bank will be losing out on interest if you do, so that normally gets taken into account.
Car loan jargon buster
Agreement term – total length of your loan.
APR – Annual Percentage Rate. This is the additional amount you’ll pay back on top of the loan.
Total repayable – the final balance owing, including the loan itself and interest, fees, and other payments.
