Choosing a car that’s right for your family needs to fit your requirements and also your budget! Choosing a car which isn’t fit for purpose or will leave you short can cost you more money in the long run. Car finance is a common way for parents to purchase a car as the cost of brand new and used cars can be too expensive to fund with cash.
Finance is a cost-effective way of getting a car and paying for it over an agreed term in monthly instalments. If you’ve been burned by finance in the past or have never taken out a car loan before, you may be wondering what the best way to finance a car for your family is.
The guide below looks at the factors you should consider before taking out finance and also the types of loan you can choose from.
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Set your budget and stick to it
The first thing you should do before you consider getting a car on finance is whether you can actually afford it. Car finance agreements last for a number of years and failing to meet the repayments each month can lead to much more serious financial implications. Your monthly budget for finance should only be around 10% of your monthly income and it also helps to see which kind of cars you can afford.
Check your credit
Before you apply for any form of credit or finance, you should always check your credit score. Your credit is very influential to your car finance agreement, and it can affect how your loan is calculated. A low credit score can make finance more expensive, or it may even cause a lender to reject your application. If your credit is low, you should consider increasing your credit score before applying to help better your chances of approval and get a lower interest rate.
See if you’re eligible
Car finance can’t be guaranteed for each and every applicant and apart from credit score, there are other factors which affect your ability to get approved for finance. If you’re unsure if you’d be accepted, you can check your car finance eligibility before you apply by using an eligibility checker. This gives you an indication of whether you would be approved, based on the lenders criteria.
Once you’ve considered the above points, you might be ready to start applying for finance. A common mistake many drivers make is not researching which type of car finance is right for you. Many assume car finance is just one agreement but finance for a car can actually come in a number of forms.
The most common finance deals in the UK are hire purchase, personal contract purchase and a personal loan. We look at each in more detail below to see which could be right for you.
Types of car finance to consider:
Hire purchase
A hire purchase car finance agreement is typically the most straightforward finance to get your head around. Hire purchase is when you borrow an amount which equates to your chosen car with any additional fees and interest on top. The lender buys the car from the dealer on your behalf, and you then pay back the lender in equal monthly payments till the agreed term has ended. Hire purchase are typically spread over 3-5 years and you can choose a term that suits you with monthly payment to fit in with your budget. Over the course of the agreement, the loan will be paid off and at the end, there is just a small option to purchase fee to pay. Once this fee has been paid, the ownership of the car is transferred over to you away from the lender and means you will be the legal owner of the car with no more payments to make.
Personal Contract Purchase
Personal Contract Purchase is one of the most popular ways to finance a car, but it can come with more restrictions that other options. Unlike hire purchase, you don’t spread the cost of the loan into equal payments. Instead, you make lower monthly payment to cover some of the cost and leave a large balloon payment until the end of the loan term. If you wish to keep the car, this payment will need to be made. You also do have other options though and you can choose to either hand the car back to the dealer or use any positive equity in the deal towards another car on finance.
Personal loan
A personal loan is different from the other forms of finance above as they aren’t secured against the car. A personal loan can be used to fund anything you like but is a popular way to get a car as they tend to offer low interest rates. You would apply for a set amount of money from a bank or building society and if accepted, the money gets deposited straight into your bank account. This means you can go and buy a car just like a cash buyer from a dealership or even a private seller.
You then make agreed monthly payments till the end of the term to pay the loan back. If you sell the car before the loan ends, you will still need to continue to meet the monthly payments as the loan isn’t secured against the vehicle though. However, you could use money from the sale off the car to pay off the loan early and settle it in full.
