The car finance industry has massively increased in the past few years, with more people than ever choosing to finance their next car. Car finance is an affordable way to get the car you want and pay for it in monthly payments with added interest.
Car finance can be really straightforward but there are a few things you should know before you sign on the dotted line. There are a number of checks required before lenders accept you for finance and also a number of different car finance agreements to consider.
How much does car finance cost?
There’s no one size fits all cost for car finance, and it can depend on a number of things. Your finance offered can be determined by length of the contract, deposit contribution, the car you choose, the finance type, interest rate and your credit score. With this in mind, we recommend you work out your car finance budget before you start applying.
Your budget should be based on your income and outgoings. Many lenders will ask for your bank statements to determine how much you can afford to pay. Your car finance budget should be affordable and realistic as it’s important that you can afford to pay each month. You should also factor in other car costs such as car insurance (find the cheapest rates here), road tax, fuel costs, serving and maintenance and breakdown cover.
Which types of car finance are available?
In the UK, there are 3 main types of car finance that tend to be most popular. They are personal contract purchase, hire purchase and a personal loan option. It’s best to research each before you commit to one.
• Personal Contract Purchase. PCP car finance is a form of hire purchase which covers the cost of the depreciation of your chosen car. PCP deals usually have low monthly payments and more options at the end of the term. You pay monthly payments with added interest till the end of the finance term. At the end of the agreement, you can choose to hand the car back to the dealer, pay the balloon payment and keep the car or use the value towards another PCP deal.
• Hire Purchase. Hire purchase is a more straightforward option but you may pay higher monthly payments than PCP. This is because the loan amount covers the cost of the car you choose. At the end of the agreement, there’s no large balloon payment to pay but instead an option to purchase fee which is a similar to the monthly payments. Hire purchase is a good option for people who are struggling to get approved for finance or want to own at the end of the agreement.
• Personal Loan. Personal loans are an easy way to get a car on finance. Personal loans are usually offered by banks or building societies and can be more suited to those with good credit scores. A personal loan isn’t secured against the vehicle so you own the vehicle from the start and can modify it as you like. You can choose to sell the car at any point, but you will still need to continue to make the repayments.
Which factors affect car finance rates?
For finance providers, there is a level of risk when they lend money out. The risk they take is whether the customer will pay back their loan or not. There are a number of factors that car finance lenders look at and help to determine whether they will accept you or not.
• Credit score. Your credit score is a big indicator as to whether you will pay back your loan on time. Your credit score is based on your history of making repayments. Many finance lenders will require you to pass a credit check upon application.
• Deposit contribution. Making a larger down payment for car finance can help to reduce your interest rate and also your monthly payments and also means the finance provider doesn’t have to lend as much out.
• Affordability. As mentioned above, your affordability affects how much you will be able to borrow for a car. Having higher affordability can increase the amount you could borrow.
Does getting car finance affect your credit score?
Applying for car finance doesn’t harm your credit score if you use a soft search credit check. If you have a bad credit score, you can use your car finance deal to make the payments each month on time and in full and help to increase your credit score! Your credit score can only be affected by car finance, if you make multiple hard searches on your credit file in a short space of time or if you fail to make your car finance payments.
Do you need to have a deposit for car finance?
Having a deposit to put down for car finance can help to get you approved, reduce your monthly payments, and also lower your interest rate offered. This can save you money in the long run and get you a better rate. However, if you do need a car in a hurry and don’t have a deposit to hand, you can still apply for finance. Car finance agreements such as Hire purchase can enable you to get no deposit car finance with affordable monthly repayments.