Whether you’re buying a new or used car, it can be a big financial commitment and you want to make sure you’re making the right decision. More people than ever are choosing to fund their next vehicle through car finance or a loan. But if you’ve never taken out finance in the past, you may be wondering if its right for you. It’s also worth remembering that car finance is never guaranteed, and you should be wary of companies who offer guaranteed car finance as you may be required to pay high interest fees.
There are a few things that that you should consider before you commit to financing a car or van. Let’s take a closer look.
How Does Car Finance Work?
Car finance is a legal agreement which allows you to borrow an amount to fund your chosen vehicle. You borrow money from a car finance lender and pay them back in monthly instalments. You will also pay interest on top of your loan which can be calculated into your monthly payments. Car finance agreements can be spread over 1-5 years, but you can choose how long you’d like to pay back your loan. Some car loans will also require you to put down a deposit which can be as high as 10% of the value of your chosen car. You can acquire a car loan online, at a car dealership or through a car finance broker.
6 Considerations Before Taking Out A Car Loan
Getting a car on finance is great, you can spread the cost into affordable monthly payments and probably get a better car than you had first thought. However, there are 5 factors which may limit how much you can borrow and your chances of approval.
1. Credit Score
With most financial products, you will usually be required to pass a credit check before you can get accepted. Your credit score can determine your interest rate and your likelihood of being accepted. If you’ve had trouble in the past with meeting repayments and not handling your credit correctly, you may have a low credit score. Lenders usually reserve their best deals for people with good credit scores because they are less likely to default on their car loans. It is possible to get bad credit car finance but you may get a better rate if you repair your credit score before you start applying.
2. Budget
Before you start applying for finance, you should work out how much you can afford to pay each month. Agreements can last a number of years so it’s crucial that you know you can meet each repayment till the end of the finance term. If not, you may have the car taken away from you by the lender and negatively impact your credit score. You should consider you income and regular outgoing and work out how much you can afford to spend on car finance. Lenders tend to favour those in full time employment with fixed regular income but there are also options available or people with part time job, benefit income and self- employed workers.
3. Running Cost
Before you commit to a car on finance, it’s worth doing your research into how much it costs to run a car. If you’re a new driver, you may not be aware of the costs associated with owning a car. It’s worth comparing car insurance premiums, fuel costs and MOT and servicing costs of different makes and models that you like. In the UK, your vehicle will also need to be taxed and paid for annually or monthly. Road tax rates can vary massively depending on the amount of carbon dioxide emissions released by the vehicle.
4. New vs Used
When comparing cars on finance, you may also want to explore both new and used financing options. Used cars tend to be lower in price so your monthly payments can be more manageable. However, some new cars may come with 0% interest which helps you save money in the long run. It’s worth noting that new cars depreciate quicker than used cars and you could lose out when it comes to selling your car on.
5. Car Insurance Rates
Car insurance is a legal requirement in the UK and gives you financial protection if you were to be involved in an accident. Young drivers or first-time drivers often pay high premiums in their first year of being on the road as they are more likely to be involved in a crash due to lack of experience. Car insurance rates can also be affected by your annual mileage, the make and model of your vehicle, your age and occupation. It’s worth comparing insurance rates before you get a car on finance.
6. Part Exchange
Having a car to part exchange can be beneficial to your finance agreement. Part exchanging a car can help to offset the cost of your next vehicle. Car dealers will usually give you a valuation of your current car and factor in any additional fees involved and then use the amount as a deposit for your finance deal. It means you don’t have to spend time finding a buyer for your car and you can drop it at that dealership when you collect your new one.
Car Loan Conclusion
Taking out a loan for a car is a big financial decision for drivers. Keep these 6 considerations in mind to make sure you make the right choices.
