7 Things to Know Before Committing to Car Finance
The UK car finance industry is booming and now over 90% of drivers use some form of credit or finance to help them pay for a car. Car prices are expensive, both new and used, and it can be hard to save for one lump sum payment. With that being said, car finance won’t be offered to everyone, and it may not be suitable for you. If you’re looking to finance your next car, read our 7 things to know before car finance to help get yourself ahead of the game.
A Low Credit Score Can Hold You Back
A credit check is mostly used to see that how likely you are to pay back your car finance on time. Based on your previous history of borrowing and your credit report, lenders will decide if they want to offer you finance or not. Granted there are other factors which can influence their decision, your creditworthiness is a biggie.
A bad credit score due to missed payments or high levels of debt is enough for a lender to decline your application for finance. Before you start applying for loans, you should check your credit score and improve if you need to. Simply things like paying your bills on time, reducing how much debt you owe and fixing any mistakes on your credit report can all contribute to improving your credit score.
The Size of Your Deposit Matters
You’ll often see cars on finance with no deposit being advertised but some agreements can require as much as 10% of the value of the car as a deposit so it’s worth keeping in mind. Having a deposit to put down for finance can put you in a good position with the lender as it shows good financial security and also lowers how much you need to borrow from them. Reducing your loan amount with a deposit can reduce your monthly payments and could even get you a lower interest rate.
Car Finance Isn’t One Size Fits All
When hunting for car finance, many drivers take the first option they find but car finance can actually come in a number of forms. Personal loans, Hire Purchase and Personal Contract Purchase are all different types of car finance. Each one has its own structure, and you may even qualify for one finance deal and not others. Take some time to explore each in more detail before committing to one.
You May Not Own the Car
Two of the most popular car finance agreements are Hire Purchase and Personal Contract Purchase. Many people don’t realise these are secured loans which means the lender requires collateral to secure the loan. In this case, the collateral is the car, and the lender owns the car throughout the agreement. If you fail to make any payments during the agreement, the lender has the right to take the car off you.
Lower Monthly Payments Can Be Costly
When you shop round for car finance, you may find that you can choose a loan term over 3-5 years. You may notice when you lengthen the loan term, it reduces the monthly amount. This can be attractive as it is a lower payment each month but overall, it can end up more expensive. A longer loan term can increase your interest rate and means you could end up paying more than you need to.
Financing a Dealership May Limit Your Options
Traditionally, if you want to get a car on finance you would apply for finance at the dealership in which you have seen a car you like. This can be an easy and efficient way of getting a car loan. However, dealers can be restricted to a limited number of lenders on their panel, and you might not be getting the best deal. More drivers are opting to use a car finance broker to help them sort their finance instead. A broker helps you find a deal with a wide panel of lenders, and then you can take your finances to any FCA-approved dealership and get a car within your budget.
Negative Equity is Very Common
Negative equity is the car you have on finance is valued at less than what you owe on the agreement. Negative equity is very common, and it can be more likely to happen when you choose a longer contract. Negative equity poses risks because you can’t use the value of the car to clear the loan. You can get out of negative equity by settling the loan in full, but this can be costly.
