When it comes to buying a car, you need all the information to make an informed decision. This guide has all you need to know about car finance.
When it comes to buying a car, you need to kn4ow exactly what you’re getting. Buying a car is no small thing. There’s the payment methods and choosing the right car, within your budget, that works for you. But, what happens when you don’t have the cash to match your dream car? Luckily, there’s car finance, but how much do you know about it? We’ve put together a complete guide to car finance, to help you understand exactly how it all works. We’ll be talking about the benefits and the risks involved, as well as the best rates on loans and other methods of borrowing money to finance a car. Welcome, to the complete guide to car finance.
What is Car Finance
Car finance is actually fairly simplistic. It only involves around two stages. The first, is choosing your payment method. This can be a loan, hire purchase, lease or even a dealership finance scheme. And the second, is finding the car you want, for the best deal. It’s really that easy. We use the term car finance when talking about buying, simply because it’s covers so many different payment methods, that its easier to talk about it as a single term. We’ll get into the grit of all the different payment methods, further along in our guide.
Buying a Car
Whilst there are methods of borrowing money for a car or car purchasing schemes, it’s is sometimes advisable to purchase one yourself. It’s all dependent on the current market – the price of cars, the interest rates etc. all factor into car finance plans. If you’ve got the money spare, and it won’t leave you in a tight financial spot, then you should look into purchasing a car with your own cash. Using cash or credit cards is always advisable (as long as the interest rate is low or 0%). Simply because you will own the car yourself. Through other payment methods, the car is the property of the lender, until it is paid off in full. So, if you can afford to, you should.
Credit Scores and Car Finance
But if you can’t afford to pay for the car outright, what are your options? We’ll be going into payment methods below, but your credit score depends on the kind of deal you’ll be able to get on car finance. Your credit score is your digital footprint, and it allows lenders to see what kind of borrower you are. Your credit history covers everything from late bill payments to previous loans paid out. It all adds up to determine your credit score, which is, for most lenders, what they base application approvals on.
All lenders want to be assured their investment is returned, with the added interest, so if you’re credit score isn’t great, you may be unlikely to get a great deal on car finance. However, we’ll be discussing the alternative methods for borrowing money, for a car, even if you have bad credit. For now, keep reading to find out all the different methods of financing your new car!
A Personal Loan
If you’re looking to own your car ASAP, but don’t have the money to do so, a personal loan can be a great way of getting the cash for it. Personal loans are available from banks and loan companies, which allow you to use your loan for almost anything (as long as it’s legal). Personal loans are unsecure loans, meaning nothing has to go up as collateral against the loan, and are typically for smaller amounts of money.
Banks and other lenders will require you to apply for the loan, some may ask what it’s for, and provide them with your credit score before approving an application. The better your credit, the better the interest rate you’ll receive on the loan. Your loan is repayable over a set period, be it long term or short term, and you’ll pay back the loan in full, along with any added interest charges on top of the borrowed amount. APRs on personal loans can range anywhere from between around 4% to as high as 69% (dependent on your credit rating).
The Good: You own the car and will not have to pay a deposit.
The Bad: Some lenders can repossess your possessions if you fail to meet payments. Interest charges can be higher if you have bad credit and paying a loan back over a longer term means you’ll pay more interest.
Bad Credit Option – If you’ve got bad credit, some lenders and banks may not even approve you for a car finance loan. However, there are methods to borrow money without having good credit. If you apply for a loan with a guarantor, you could land yourself a loan. Guarantor loans work on the basis that should you be unable to make repayments on the loan, you guarantor will cover costs for you (as a last resort). That means that guarantor lenders will not require your credit score to offer you a loan. However, guarantor loan interest rates are typically higher than other loans (between 45% – 69%), which means you’ll be paying a lot more back than you initially borrowed. For those with bad credit however, it is one of the fairest rates on a loan you’ll be able to receive.
In recent years, car leasing has become more and more popular amongst UK car seekers. How leasing works is you pay a monthly charge (with interest), over a set term until you have paid off roughly half of the car (varies between lenders). Once that is completed, you are given three choices. You can choose to return the car to the leaser, keep the car (and pay back the remaining value on the car) or trade in the car for a replacement. It’s similar to paying back a loan, with fixed monthly repayments, but there are more options at the end of the contract.
Throughout the duration of the leasing, the car is your property and responsibility. Which means, you have to maintain it and meet the restrictions set by the leasing company. Leasing companies usually set a millage limit, as well as asking that you keep the car in a good condition throughout the duration of the term. Costs can arise when leasing car, with an initial deposit and then charges at the end of the lease (dependent on which option you choose).
The Good: There are a lot more options open to you at the end of the lease. Leasing monthly payments are usually lower than personal loan charges.
The Bad: You need good credit, a deposit and to be able to cover the monthly payments on your leased car.
Bad Credit Option – Some lenders will be able to approve your application if your credit is bad, however you may have a higher interest rate on top of your car leasing payments. You could use a guarantor for car leasing, which means should you fail to make repayments on your car, they will be responsible. Other options include joint financing or someone else leasing the car for you. However, always discuss the options with your chosen car leasing company.
Like leasing, hire purchase car finance also requires the borrower to put down a deposit before entering into the agreement. The details are fairly similar to leasing; however, the end product differs. With hire purchase, you pay monthly payments on your car and at the end of the term, you have to purchase the car. It’s a scheme that allows you to eventually own the vehicle. However, throughout the duration of the payment, the car is not yours (technically). Yes, you may drive it and it may be in your name, but until it is paid off in full, the car is under the ownership of the hire car company.
Whilst some hire purchasers ask for your credit history, some offer a fixed rate no matter your history. It’s likely to be a higher interest rate if your credit is bad/ Those with bad credit are more likely to land themselves a hire purchase deal, however, unlike guarantor loan it is a secure scheme. Meaning the car can be reclaimed if you fail to meet the monthly repayments.
The Good: You’ll eventually own the car and, if you’re on a smaller budget, the payments are more manageable. Also, you’re more likely to be approved if you have bad credit.
The Bad: You could lose the car and the interest rates may vary dependent on your credit score.
Bad Credit Option – Dependent on the hire purchase company / deal, your credit score may not factor into your contract. Some offer a fixed interest rate, regardless of your credit score. This can be anywhere from around 20% – 40%, dependent on the lender. It’s ideal if you have bad credit, but if you have good credit, you may not be getting the best deal. Always check your credit before you look into hire purchase options for bad credit.
Whilst there are many companies that can offer your car finance options, one that is open to you from the car dealers themselves is dealer finance. Car dealerships offer buying schemes, which are similar to hire purchase. However, many dealers count on one thing – that you won’t look around for the right deals. You could end up paying a staggeringly high interest rate on a car that would have been more affordable through another car finance method. Whilst you might be drawn in by low monthly costs, the overall amount repayable could be a lot more than the car is worth. So, be aware of what sort of deal you look for before you enter into dealership finance.
The thing about dealers is that there is a lot of ‘wiggle’ room. Everything is up for negotiation, don’t assume it’s the same as walking into a shop, and paying the set price. Until it is set in writing, it is what you’ll pay. Dealers will be able to reclaim the car should you fail to make the monthly repayments on it. They will often try to entice you with extras added in (gifts, servicing etc.) in order to convince you to sign the contract for the dealership’s finance.
The Good: You can ‘haggle’ the price and, if you’re willing to look around, you can find some good deals.
The Bad: You must do your research in order to avoid getting a bad offer.
Bad Credit Option – As with most other finance options, you credit rating will affect the deal you get on dealer finance. The interest rate is dependent on the dealer and may increase dependent on your credit score. It’s all down to the dealership who you choose to finance your car from.
Checking Your Credit
There are a few ways to check your credit score, both for free and paid. The 3 main agencies that provide credit scores, each with their own scale, are Equifax, Experian and Callcredit. You are legally entitled to have your fully up to date credit report for a small fee (£2), and from that you’ll be able to assess your credit score from there and make an informed decision about your car finance options.
So, whatever you decide to do, there are options open to you when it comes to car finance. Good or bad credit, there’s a way to finance your new car. Consider the cost of car insurance, road tax and more before choosing your car finance option.