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5 Things All Drivers Must Know Before a Car Loan
In the past few years, the cost of new and used cars has been higher than ever and they don’t seem to be coming down any time soon. This is making it increasingly harder for drivers to be able to pay for a car with cash. Cash is the most cost-effective way to buy a car as there’s no monthly payments, the car will be yours to own from the start and you won’t pay any interest or additional fees. But, if you find it hard to get the money together, you may be looking to car finance as a way to fund your next vehicle.
Car finance or a car loan is a way to get a car and spread the cost into monthly payments that fit your budget. Car finance can’t be guaranteed to everyone, and you will need a lender to agree to give you the money to buy a car first. If you’re approved for car finance, you can choose to make monthly instalments over a term that suits you, usually, between 3-5 years. If you’ve never had a car loan before, read our top 5 things all drivers should know before applying for finance.
1. Your Credit Score Matter
When you make an application for finance or a car loan, the lender will want to know how likely you are to make your monthly car finance payments on time and in full. The best way they can predict this is by checking your credit score when you apply and seeing how you’ve handed credit in the past.
A low credit score usually means you have no credit history, have made late payments, missed payments all together or have lots of debt already. Lenders may be put off by a low credit score as you could be seen as a higher risk. It can be easier to get accepted for a car loan when you have a ‘good’ or ‘excellent’ credit score, and it could give you access to a lower interest rate too.
2. Low Payment Aren’t Always a Cheaper Option
Shopping around for car finance is highly advised to make sure you’re getting the best deal possible. However, many drivers think this means getting the lowest monthly payment possible. Finance deals like PCP finance offer low monthly payments, even on brand new cars because much of the value of the car is differed until a final balloon payment to take ownership of the car.
This payment can be hard to meet though, and many drivers instead decide to hand the car back to the lender. The low payments may be attractive but handing the car back at the end of the deal, means you won’t own the car and have nothing to show for your payments.
3. You May Not Own the Car
As we’ve quickly mentioned above, there are finance deals such as Hire Purchase and Personal Contract Purchase (PCP) which are secured against the car. This means at the start of the deal; the lender buys the car on your behalf, and you won’t actually own the car during the agreement.
The ownership will lie with the lender, and you won’t take ownership until all payments have been made and you’ve made the final balloon payment (PCP) or the option to purchase fee (HP). If you want to own the car you are driving, it may be worth looking into an unsecured loan such as a personal loan instead.
4. Find the Lowest Interest Rate Possible
Interest rates are really important when it comes to car financing and choosing a high interest rate can be costly. There are some finance deals which come with no interest to pay but these are often on brand new cars and may only be offered to suitable candidates. Usually, you will have to pay some form of interest on your finance deal as lenders use it as a way to make money.
It’s important you compare finance deals to find the lowest possible to make sure you’re not paying more than you need to. You could also consider increasing your credit score or putting down a larger deposit to help get low rates on car finance.
5. Don’t Apply Everywhere
We appreciate we’ve talked about comparing finance deals by finding different lenders but making too many applications in a short space of time can harm your credit score. This is why we recommend using a car finance broker to find the best deal on your behalf. Instead of making multiple applications with different lenders, you only need to apply once with the broker, and they work on your half to mat you with the best lender with the lowest rate!
They are usually free to use too but it can be worth checking if they charge any fees. Brokers work best for used car buying and once you’ve secured the deal that’s right for you, you can then choose a car within your budget from any participating dealership.
