5 reasons to get a car on finance and what to look out for
This is a collaborative post
More drivers than ever are choosing to finance their next car but if you’ve never had a car on finance before or you’ve chosen the wrong agreement, you may be wondering if it’s right for you. Many people like car finance as it allows them to get a better car than they would with cash and pay for it over a term that suits them. The guide below looks at the top 5 reasons why you should finance a car but also looks at the factors that you should consider before taking out a car loan.
- Spread the cost.
The main reason that drivers like to use car finance is because they can spread the cost of owning a car into affordable monthly payments. You can choose a term and monthly payments that suit your budget and also get the car you want! Car finance payments mean that you can choose a finance term between 3-5 years and many deals also benefit from a fixed rate of interest which means your payments won’t change during the period. This can make it much easier to budget for your car loan over the years.
- Get a better, newer car.
For many years, cash was king. However, car finance is a more affordable option for many drivers because of the rising cost of new and used cars. It can be hard to buy a car with cash alone as even second-hand cars can cost thousands of pounds to buy. Car finance means that you can get a better car than you would when buying with cash alone. In many cases, you can even get a brand-new car with low monthly payments when you choose an agreement like personal contract purchase (PCP).
- Improve your credit score.
It’s a common misconception that getting a car on finance can negatively impact your credit score. However, using your finance agreement correctly can help to increase your current credit score. When you meet all your payments on time and stick to the rules of your finance agreement, you are showing strong evidence of handling credit responsibly. Along with keeping your credit usage low and paying off any other debt you owe, you can improve your credit score!
- Multiple finance agreements to choose from.
You may think getting a car on finance is a one size fits all agreement, however, there are 3 main types of finance in the UK. These tend to be a personal loan option, hire purchase car deal and a personal contract purchase deal. You may be better suited to one form of car finance over others, and it can be a good idea to look at each in more detail before you commit to getting a car. Personal loans tend to be the most cost effective, but you may be declined if you have a low credit score. Both hire purchase and PCP car finance deals are secured loans which means the lender owns the car until the final payment has been made. It can be a good idea to explore each in more detail to see which you are better suited to.
- Options to own the car at the end of the deal.
The beauty of getting a car on finance is that you can choose whether you own the car or not. If you use a personal loan to get a car, you will be the automatic owner of the car as you buy it outright with the loan from a lender. This means you can sell the car when you want or modify it however you like. Hire purchase and PCP are both secured loans which means the value of the car is secured against the loan if you fail to repay, the lender has the right to use the car as collateral and take it off you. In both HP and PCP, you can choose to own the car at the end or not. If you wish to take ownership of a HP, there is just a small option to purchase fee to pay. It may not be as beneficial to own a PCP car as you will need to pay a large balloon payment at the end of the deal if you wish to take ownership.
What to consider before taking out a car loan
Whilst there are so many benefits of getting a car on finance, it is always subject to status, and it’s never guaranteed and there are a few factors you should consider first.
Credit score
Your credit score can affect the likelihood of getting a car finance approval and also the interest rate you are offered. Having a bad or low credit score usually indicates that you’ve mishandled credit in the past and that you have missed payment or have high levels of debt. This increases the risk to the lender as you are more likely to default on loans again in the future. If you have a low credit score it can be a good idea to work on your credit and improve it before you start applying as it can help to get you better rates, easier acceptances and save you money.
Budget
Your budget for car finance is really important and you should never take out a loan that you can’t afford to pay back. Lenders need to stick to the rules of responsible lending which helps to protect customers from getting a loan that they can’t afford. Lenders will usually ask you to provide bank statements or payslips to prove your income and could decline you on the basis of insufficient affordability.
