AD| Should you take out car finance?

There are a few ways in which you could fund your next car, but car finance is a great way to spread the cost of owning a newer car into affordable monthly payments! Long gone are the days of scraping cash together for your next car as there are many different ways. Even if you choose to finance your next car, there are a few different types of car finance agreements and some may suit you better than others! Let’s take a look at the benefits of car finance and whether its right for you! 

Can you afford car finance?

Car finance is usually split into monthly payments with added interest which are agreed at the start of your car finance deal. Your interest rate is dependent on a variety of factors such as credit history, length of finance and deposit. When you work out your finance budget is it crucial that you can afford the monthly payments. Failing to meet your repayment schedule can negatively impact your credit score and if the loan is secured against the car, you could have the car taken away from you by the finance company. 

When working out your budget, you should also consider other costs which are associated with owning and running a car. For example, road tax, car insurance, breakdown cover, MOT and servicing costs, fuel costs and any unexpected repair costs. 

Will you get accepted?

No car finance lender can guarantee car finance to everyone. Advertising guaranteed car finance is unethical and irresponsible but there are a few ways in which you can help secure car finance. To get approved you usually need to have been a UK resident for 3+ years, be over 18 years old and not currently bankrupt and have good credit. However, there are many specialist ca finance brokers who help people get car finance with bad credit. If you are worried about your ability to get accepted for finance due to bad credit, you could consider how to improve your credit rating first before applying. 

Which car finance agreement should you choose? 

Many people still have the misconception that car finance is one agreement and that’s it. However, the most popular car finance agreements in the UK are Hire Purchase, Personal Contract Purchase and a personal loan option. 

Hire Purchase

Hire Purchase car finance is really straightforward. You are essentially hiring the car from the lending company till the end of your finance agreement. You usually put down a 10% deposit for the car you want (there are many no deposit car finance deals also available too) and then make fixed monthly payments till the end of your agreed term with added interest. The loan is secure against the car so you won’t become the legal owner of the car till the end of the agreed term and if you fail to make your repayments to the lending company, they can take the car off you. You can get a hire purchase car finance deal from a dealership, finance lender and car finance broker. 

Personal Contract Purchase

Personal Contract Purchase (PCP) is the same as Hire Purchase in it lending principles above, but you can usually benefit from lower monthly payments than other options. This is because the whole cost of the car isn’t spread across the term like it is with Hire Purchase. The loan is secured against the car but at the end of the agreement you have 3 options. You can either hand the car back to the dealer and walk away, pay the balloon payment and keep the car or use the Guaranteed Future Value of the car to start a new PCP deal on another car. This is a good option for people who like to change their car every few years. 

Personal Loan

A personal loan can be offered by a bank or building society and can be used to buy anything you want. You would apply for a personal loan and if accepted you would get the amount deposited into your bank account and then meet the repayment schedule each month with interest. You can then buy a car outright from a dealer or private sale. You will automatically be the legal owner of the car from the start so you can choose what you do with the car whenever you want. Keep in mind that you should set your loan repayment to realistic term. If you sell your car before your loan repayments are up, you will still have to pay back the loan each month till the end of the team.