Car Financing: 5 Things you Need to Know

So you’re in the market for a new car, but you have no idea how you’re going to foot the bill. Paying cash is simply not an option. However, just the thought of car finance is enough for you to put the brakes on! 

But, car financing makes buying a vehicle more affordable. It opens up the opportunity for more choice, cars with the highest safety features and much more. 

Whether you need a personal loan, need to consider Hire Purchase, a Personal Contract Plan or have no idea where to even begin, here are 5 things you need to know about car financing:

Car financing makes purchasing more affordable

One of the biggest perks of car finance is that it takes something that has high upfront costs and makes it more affordable. Whichever car finance deal you choose, it will be a fixed loan. So you will only pay a fixed amount each month for a set amount of time, with options varying from 24 months to 84 months. 

This allows for you to budget more efficiently and know exactly how much you are spending each month. Within the life of the loan, the interest and repayments stay the same, all while you reap the benefits of a new or nearly new vehicle. 

A car loan is a secured loan

Yes, a car loan is a secured loan, but the collateral is the vehicle itself. So if you miss a payment, the car will be repossessed rather than anything more severe. While you could attempt to get the car back, you’d be better off simply repaying the back payments. 

While it’s tempting to go for a longer-term loan (60 – 84 months) as repayments appear lower on the surface, you’ll end up paying more in the long run due to higher interest rates. You’d be better to bite the bullet and go for the shortest term deal you can afford. 

You can shop around for the best deal

While dealerships offer car finance, you don’t have to treat the whole buying experience as a “one shop for all” kind of deal. Instead, take the time to shop around before you enter the showroom. If the idea of turning down a salesperson face to face doesn’t work for you, most dealerships will let you purchase directly from them online and even deliver to your door. 

So make sure you check out all the finance deals available to you that work with your budget ahead of signing on the dotted line. You could save yourself hundreds of pounds and all for scrolling online for half an hour. 

Comparing quotes online won’t damage your credit score either, as they will only use a “soft search” to check your credentials. It’s only when you commit to a deal that a “hard search” is undertaken, which will appear on your credit history for other lenders to see. 

There is more than one type of car finance

While a personal loan is perhaps the most popular and well-known type of finance, there are other options available to you:

Hire Purchase (HP):

• Secured against the vehicle itself
• You own the car once the final payment has been made
• You can’t sell it without the lender’s permission
• You can return the vehicle
• 10% deposit is typical before making fixed monthly repayments

If you miss a payment, the car may be repossessed. An HP loan can occasionally prove more experience than an independent bank loan. However, servicing is often included!

Personal Contract Purchase (PCP)

• Typically, you pay a 10% deposit followed by low monthly instalments over a fixed period
• At the end of the loan period, you can either pay a “balloon payment” to purchase the car outright
• You can return the vehicle or sell of privately to pay off the remaining balance
• PCP is a good choice for people who like to change their car regularly
• Loan is based on the ‘minimum guaranteed future value (MGFV)

If you go for a PCP loan, make sure you stick to your agreed mileage limits and keep the car in a good, clean condition to avoid any penalties. After all, you are essentially hiring the vehicle and will not own it until the final balloon payment is made. 

Personal Leasing (Contract Hire)

• Low fixed monthly repayments
• Typically required to pay up to three months hire upfront
• No option to buy the car at the end of the loan period
• Great for people who like the convenience of changing their vehicle without any strings attached
• The type of car, agreed mileage limits and length of contract will determine the overall leasing cost

Although servicing is usually included, there is a significant upfront deposit to consider. Before considering a Personal Lease, ensure you do your homework first and find a deal with the lowest APR, monthly repayments, and purchase options.

“Bad credit” car finance exists

Several factors may hinder you from taking out car finance, such as a recent loan rejection or poor credit history. The truth is, your credit rating can take a hit from your circumstances changing, not updating your address details or from missing a payment on your mortgage, phone bill or other significant financial agreement. 

But none of that should put you off!

Bad and poor credit car finance lenders exist. They will look at your individual circumstances, see what you can reasonably afford and more to get you back on the ladder. Not only will you have access to more vehicle choices, but you can rebuild your credit rating in the process by making timely repayments. 

Even if you are self-employed, have a County Court Judgement (CCJ) or default, or have no credit history whatsoever, purchasing your new car with “bad credit” car finance is possible. 

Car financing is the most popular way to buy a car for numerous reasons. From making a new vehicle more affordable to help you rebuild or boost your credit score, are you ready to take the plunge?