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How to make car finance work for you. 

Hillary Cyril | Editor, TechAnnouncer



car finance

Are you one of the drivers relying on car finance to fund your next car purchase? You’re not alone! Most drivers now rely on some form of finance or credit in order to afford a car. Car finance won’t be offered to everyone who applies and will be subject to eligibility and credit checks. If you want to maximise your chances of getting a car on finance and make sure your deal works for you, read our car finance guide below.

What is car finance? 

Car finance is a way for drivers to get a car but to pay for it monthly. If approved by a trusted finance lender, the money could be deposited into your bank account the same day or the lender would buy the car on your behalf, depending on which type of finance you choose. You then make monthly payments back to the lender over a number of years, usually between 3-5 years. There are 0 interest deals to take advantage of, but these are usually offered on brand new cars. Your interest rate is used to set the rate of borrowing and can be dependent on the current Bank of England’s base rate of interest but also personal factors such as your credit score, loan term length and price of the car you wish to finance. 

Types of car finance: 

There are number of car finance deals you can choose from and depending on what you want from your deal, you may be suited to one form of finance over others. The most popular agreements for UK drivers are a personal loan option, hire purchase and Personal Contract Purchase car finance. It can be worth exploring each in more detail to see which suits you best, but we’ll give you a quick run down below. 

Personal Loan. 

A personal loan is an unsecured loan and it’s the most straightforward way to finance a car. A personal loan is unsecured because the lender doesn’t secure it against an asset. When a loan lender agrees to borrow you a set amount of money and it goes into your bank account. You can then buy the car you want with the loan and own the car from the start of the deal. Your agreement starts and then you make monthly payments back to the lender over the term you agreed on. 

Hire Purchase. 

Hire purchase is a secured loan, this means the lender owns the car throughout the agreement. The money isn’t deposited into your bank like a personal loan and instead the lender would buy the car on your behalf from the dealer. You then make payments back to the lender until the end of the term. If you fail to repay the loan at any point, a secured loan enables the lender to take the car away. You won’t own the car until all monthly payments have been made and the small option to purchase fee is completed. 

Personal Contract Purchase. 

Personal Contract Purchase (PCP) is another example of a secured loan, but it has a different structure to Hire Purchase. PCP deals can offer low monthly payments to drivers because instead of spreading the full value of the loan like you would with hire purchase, you only pay off part of the loan. You make monthly payments over 3-5 years and then at the end of the deal, there’s a large balloon payment to make if you wish to keep the car. Alternately, you can part exchange your car on PCP to get a newer, better car on a new deal. If you don’t want another car, you can also choose to hand the car back to the dealer as long as it’s in its agreed mileage, good condition and all monthly payments have been made. 

Ways to prepare for a car finance deal: 

This may sound silly but preparing for your car finance application can help to save you money! Follow these top 4 tips below on how you can make car finance work for you.

1) Check your credit. 

It is recommended you get into the habit of checking your credit score at least once a month and especially before you make any application for finance or credit. Lenders will use a credit check for car finance to see what your current score is, how much debt you currently owe and your previous payment history. If you have a low credit score due to missed payments, lenders may be put off and worry you may not be able to make your future finance payments on time. If you check your score and it is looking a little on the low side, it can be a good idea to improve your credit score before making an application for finance to help increase your chances of approval. 

2) Find the right deal. 

As we’ve mentioned above, there are a few finance agreements to choose from. You should look into each in more detail and see which would be right. If you’re not bothered about owning the car and want to change your car more often, PCP could be the best way to go. If you want to own the car from the start and want to benefit from low rates, a personal loan could be the right option for you.  Personal loans may be out of reach if you have bad credit though so it’s best to check your eligibility first. 

3) Choose a shorter loan term. 

When you take out car finance, you can choose a car loan term that suits your budget. Finance deals can be spread over 3-5 years and can be tailored to suit your budget. Choosing a longer loan term will make your monthly payments smaller because you are spreading the loan over a longer period. However, taking longer to pay back your loan can increase the interest you are paying and whilst it makes your monthly payments lower, it can make your deal more expensive overall. 

4) Refinance at a later date. 

If you’re shopping around for finance and don’t seem to be getting the best deals but need a car in a hurry. You could take the lowest interest deal you can find and then work on your credit and if your situation changes, look to refinance your current loan. Usually, once you’re halfway through your agreement, you can find a lender who would want to refinance your deal and replace it with a new one. When you refinance, your take out a new loan, usually with better terms and pay for it over your agreed length. 

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