More drivers are turning to car finance as a way to fund their next car purchase. New and used cars can both be expensive to purchase outright. Furthermore, whilst cash can be a great way to avoid any restrictions or interest to pay, for many people it’s not a realistic way to get a car. If you’ve never taken out a car loan before or you’ve selected the wrong agreement in the past, you may be wary of getting a car on finance. Car loans don’t have to be a worry though. The guide below looks at the benefits of choosing to finance a car. It also a few factors you should be aware of before you sign on the dotted line.
Advantages of getting a car through finance
There are so many reasons why drivers like getting car finance in the UK and one of the main benefits is you can spread the cost over a term that’s right for you but also get a better, newer car than you would when paying with cash.
Get a better and newer car
Car finance allows you to break the cost of buying a car into affordable payments. Plus, with a higher budget, you could finance a newer and better car. Buying with cash means you need to make one lump sum to get a car. Consequently, this usually means you have to choose a car with a lower purchase price and that may be a few years older. By getting a finance agreement, you can usually afford to use your monthly budget to get a newer car.
Spread the payments to suit you
When you apply for car finance, you can choose your monthly budget and your loan term length to suit you. Your monthly budget for finance should be affordable. It is key that you can meet each and every payment till the end of the term. Therefore, remember to not sell yourself short each month as you may struggle with your repayments. Finance lenders may also put affordability checks in place where they request 3 months’ worth of bank statements to prove your income to check that you can afford your monthly payments.
Flexible agreements to choose from
Many drivers are under the assumption that car finance is one agreement. However, there are 3 main forms of finance which tend to be the most popular ways to get a car. Personal loans, Personal Contract Purchase and Hire Purchase are all form of finance and depending on your circumstances, you may be better suited to one form of car loan over the others. Take some time to explore each agreement in more detail to see which would suit you best.
Improve your credit
When used correctly, car finance can actually help to improve your credit score during your agreement. As long as you meet each and every payment, along with any other financial commitments you already owe. Then your credit score should improve throughout the duration of your loan. This is because you are showing future lenders you can be trusted to pay back your loans on time and in full.
What to consider first before taking out car finance
Whilst there are so many reasons to get a car on finance, there are a few bits of criteria you will need to meet first and also a few considerations to keep in mind.
Car finance is a legal agreement
It’s worth remembering that car finance is a legal agreement which you will need to abide by the rules of. For this reason, applicants need to be at least 18 years old before they could be accepted. Furthermore, if you fail to stick to the terms of the deal such as missed payments, it can lead to serious financial consequences. This could mean you lose the car.
Credit score matters
It can be harder to get approved for finance with bad credit as you are more of a risk to lend to. Based on your previous history of borrowing, your credit score may be low. Then lenders may decide to reject your finance application if you can’t be trusted to keep on top of your finance. Improving your credit score can get you a better finance deal, a lower interest rate offered and also easier acceptances.
Interest rates can make borrowing more expensive
Whilst there can be ways to finance a car with 0% interest, most finance deals will come with some interest to pay. The Bank of England’s base rate reflects the cost of borrowing and taking out a car loan when the base rate rises can make your car finance deal more expensive. A higher interest rate means you pay more back to the lender. This could make finance not as cost effective as it should be. Your personal circumstances such as credit score, deposit contribution loan term length and loan amount can affect your interest rate offered too.