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What you need to know before applying for a car loan

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If you’ve never taken out a car finance deal before, you may be wondering how they work and what you need to consider before applying. Car finance doesn’t have to be confusing but there are a few factors which could see you paying more than you need to. There are also a number of car finance agreements UK which you may be more suited to over others. The guide below has been designed to explore the factors you should consider before applying for car finance. 

How does car finance work?

Car finance is an easy way to pay for your next car in monthly instalments. You can borrow money from a bank or finance lender to fund your next car. It’s worth noting car finance approval is at the lenders discretion and car finance is never guaranteed. Usually, you will have to pass a credit check or affordability check before you are accepted for finance. If accepted, you will then pay back a certain amount over a number of years, usually with added interest. In many cases, you can choose whether to put down a deposit or not, but it can be required for specific car finance agreements. Car finance isn’t a one size fits all agreement and, in the UK, there are three main type of loans which tend to be the most popular. They are a personal loan, PCP deal and hire purchase. Your personal circumstances or what you want to get out of car finance may determine which is best for you. 

Where can you obtain a car finance agreement?

When it comes to getting a car on finance you have a number of options on where you can obtain an agreement. Personal loans can be offered directly from a bank or building society and can benefit from some of the lowest interest rates. Hire purchase and PCP car finance can be offered from lenders at a car dealership or online through a car finance company like a broker or loan company. You can shop online for the best car finance rates and find the package that suits you and then use your deal to get a car from a dealership in the UK. 

Factors to consider before taking out car finance: 

Car finance doesn’t have to be confusing but there can be some key factors you may want to consider before you sign on the dotted line. 

  1. . Credit score

When it comes to getting a car loan, your credit score is really important. Your credit report reflects which type of borrower you are and if you’ve had trouble in the past with meeting deadlines, you may find yourself with a low credit score. People who struggle to stay on top of their credit agreements are more of a risk to car finance lender as it likely that they will default again. Due to this, the lowest car finance rates are usually reserved for those with good or excellent credit score. If you’re not sure where you fall on the credit scale, you can use a free finance check to see how your credit is doing. If you have a bad credit score, you could consider increasing your score by making payments on time and reducing debt levels before you apply to get a car. 

  1. Explore car finance agreements

In the UK, there are three types of car finance agreement which tend to be the most popular amongst drivers. They are a personal loan, PCP deal and a Hire Purchase option. It’s worth exploring each in more detail to see which can be the most suited to your personal situation. 

A personal loan can be one of the cheapest ways to finance a car but can be better suited if you have a good credit score. A personal loan is when you borrow a set amount to buy a car. Personal loans aren’t secured against the vehicle, so you have the freedom to get a car from a dealer or private seller. You then pay back your loan in monthly instalments till the end of the term. You can spread the cost over 1-7 years but if you decide to sell the car before the end of the agreement you will still have to keep paying the deal off. 

Hire purchase can be suited to those with lower credit scores as it’s a form of secured loan. This means the lender owns the vehicle throughout the agreement and if you fail to repay, they can take the car off you. Hire purchase allows you to spread the cost of your chosen car into affordable monthly payments over 1-5 years. Interest rates are included in the monthly payment and rate can be subject to credit score. 

Personal Contract Purchase is similar to HP but instead of paying back the full cost of the car, you only pay the depreciation of the vehicle. This tends to make monthly payments lower, and you don’t have to own the car. Instead, at the end, you can hand the car back to the dealer, use the value towards another car or pay the balloon payment and keep the car. 

  1. Compare interest rates

Interest rates are really important when it comes to car finance. Interest rates reflect the cost of borrowing and people who have mishandled credit in the past can face higher interest rates. Higher interest rates mean you pay more for your car finance deal and in some cases, more than you need to. It’s worth shopping around and finding the lowest interest rate offered to help make sure you get the cheapest deal possible. 

  1. Ownership of the vehicle

The type of car finance agreement you choose can depend on how you want to own the car. A personal loan means you can buy the car from a dealer or private seller, modify the car, and then sell it when you please. If you want to be the automatic legal owner of a vehicle, then this can be the best option for you. If you want to use the car and then decide if you want it or not, you could consider hire purchase. At the end of a hire purchase agreement, you can choose to hand the car back to the dealer or pay the small option to purchase fee to keep the car. PCP is a good choice for those who aren’t particularly bothered about owning the car and want to get a newer car every few years. However, you could choose to pay the large balloon payment if you did want to keep driving the car you love. 

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