Car finance is becoming the most common way for UK drivers to buy their next car. Buying a car on finance allows drivers to spread the cost of ownership into monthly payments that suit them. Car finance is really popular, but you’d be surprised how many drivers are making common car finance mistakes, which costing them money! Choosing the wrong agreement or failing to do your research beforehand can make car financing more expensive than it needs to be! The guide below looks at common finance mistake drivers are making and how to avoid them!
What is car finance?
Car finance comes in a number of forms but usually, car finance involves a lender giving a customer money to purchase a car. Customers then make monthly payments back to the lender until the end of an agreed term. In the UK, the three main car finance agreements are hire purchase, personal loans, and personal contract purchase. Each has its own individual criteria and structure and research each in more detail can help you make an informed decision about which is right for your personal circumstances.
How to secure car finance?
In order to get car finance, you will need to make an application with a lender. An application can be done online or over the phone and takes information such as personal details, income information and will usually run a credit check on your report. Once the lender receives all the information they need about you, they will then decide if they want to offer you finance or not. You can be declined by a lender for a number of reasons and if this happens, you won’t be able to get finance from them. If you’re approved, you will agree to make monthly payments back to the lender until the end of the term you have agreed on. You will need to sign the paperwork to say you’re happy with the finance in place and get the car you want!
What not to do when taking out car finance:
It’s worth noting here that car finance will never be guaranteed to any applicant. It would be unethical for a lender to give a loan to anyone who isn’t suitable or can’t afford to pay it back. If you keep getting refused car finance, it may be worth taking some time to ask the lender why and working on your personal circumstances before trying to apply again.
1. Not checking your credit situation.
Before you take on any more finance or credit, you should always check your current credit situation to see where you stand. It can be easier to get approved for finance with a good credit score as you are less of a risk to lenders. People with low credit usually have negative markers on their report such as missed payments and makes them more likely to default on future finance too. If you need to raise your credit score, it can be worth taking some time to do so before taking on car finance. A lower credit score could get you a higher interest rate offered or see you be declined a car loan.
2. Using the dealer’s car finance lenders.
The finance first approach is becoming more popular amongst drivers. Instead of heading to the lender and applying for finance with their panel, you can secure a car finance deal through a broker instead. A broker works on your behalf to find the best car finance deal. Usually, brokers have access to many lenders and can help select the lowest APR finance deals from lenders who want to offer you finance. Brokers don’t usually charge customers to use their service and instead earn a commission from the lender for the introduction.
3. Not checking your eligibility for car finance.
Making multiple applications for car finance in a short space of time with different lenders can negatively impact your credit score. Many lenders offer a soft search eligibility check which won’t harm your credit score and can show the likelihood of being approved before making a full application. This can help to speed up time and help to protect your credit score during the car finance process.
4. Focusing on the cost of the monthly payment.
When you set your budget for car finance, it can be easy to get carried away with the lowest possible cost per month. Whilst this can fit in with your budget and you feel like you’re saving money, you may not be getting the best deal in the long run. PCP deals can offer low monthly payments but only because they include a large balloon payment at the end of the deal. Many drivers also choose to spread the cost of their finance over the longest term possible as it can reduce the monthly amount, however in the long run, you will usually spend more time paying interest which makes the overall cost of the finance more expensive.
5. Buying the first car you see with the first deal offered.
Shopping around for the lowest APR finance deal can take time but it can be worth it. Getting a car finance approval from a lender can be exciting, especially if you’ve had trouble in the past securing finance but you may not be getting the best deal. Before you start shopping for your car, you should set out your requirements as its crucial the car is fit for purpose and will serve you through the length of the finance term.