Buying a car can be one of the biggest purchases you will make so it’s important that you make an informed decision. If you don’t want to pay for your car with cash or savings, you may be considering getting a car loan or a car on finance to help fund your purchase.
If you’ve never taken out car finance in the past, you may be unsure if its suitable for you. The guide below explores the advantages and disadvantages of getting a car on finance and how you decide if it’s the best funding option for your circumstances.
What is car finance?
Car finance is one of the most popular ways to buy a car in the UK. There are three types of car finance agreement that tend to be most popular, and these include a personal loan option, hire purchase and personal contract purchase. You could also consider leasing a vehicle or buying a car on a credit card too.
Each type of finance deal has different criteria and requirements, but they all tend to have the same underlying structure. Car finance allows you to borrow an amount of money from a lender to fund your car. You then pay the loan back in monthly payments with added interest till the end of the term. Car finance agreements can last anywhere between 1-7 years, depending on the type of agreement you choose.
It’s also worth noting that car finance is never guaranteed to anyone. Car finance lenders have certain requirements that need to be met before they would consider accepting you for finance. A few factors that could affect your approval rates are your credit score, affordability, age, and employment status. You’ll also usually need to provide who you say you are by supplying proof of identity.
Advantages of getting a car on finance
More people than ever are choosing to finance their next vehicle and spread the cost. There are a number of ways getting a car on finance can be beneficial to you.
- Spread the cost
The biggest benefit of getting a car through financing is that you can spread the cost to suit your budget. Saving up to buy a car with cash can take a long time and sometimes you may need a car in a hurry. Car finance can be a fast and straightforward option in this case. You can choose a loan that suit you and pay it back in monthly instalments with interest.
- Get a better car
For many people, car finance means they can get a better car then they would if they were using cash. A brand-new car can cost thousands and it would take a long time to save up. Even used cars can set you back quite a bit so using car finance can help make owning your next car more affordable.
- More manageable budget
Car finance can suit a whole range of car finance budgets. Depending on the car you choose and your affordability, car finance can be a flexible option for different circumstances. If you’re not sure how much you can afford for car finance, you could consider using a car finance payment calculator which will give you an idea of a loan amount. Calculators like this are based on real car finance applications and by setting your budget, length of loan duration and your current credit score, you can get an accurate idea of how much you could borrow.
- Improve you credit score
It’s a common misconception that getting a car on finance harms your credit score. Your credit score can be affected by factors such as your ability to make payments on time and in full. When you take out finance, you will be required to meet your repayments each month. Meeting these payments along with any other credit or finance you owe can help to improve your credit score.
Disadvantages of car finance
Reading the above benefits may leave you wondering if there are any drawbacks to getting a car on finance. Let’s explore why car finance may not be suitable for all applicants.
- Paying interest back
Most car finance agreements require you to pay interest on top of your loan. Having a bad credit score or choosing a longer loan term can increase the APR you are offered. This means you will pay back more overall compared to other applicants. In most cases, you will always pay more for the vehicle due to interest than you would if you had bought it outright with cash.
- You could lose the vehicle
Hire purchase and personal contract purchase are a secured type of loan. This means that the loan is ‘secured’ against the vehicle and the lender owns the vehicle throughout the agreement. If you fail to meet your repayments, the lender has the right to take the car off you or repossess it. If you’ve had trouble in the past with defaulting on loans, car finance may not be the best option for you.
- Mileage restrictions
Personal Contract Purchase is a form of car finance that allows you to pay for part of the car. At the end of the agreement, you can either pay the large balloon payment and keep the car or most people choose to hand the car back to the dealer. Due to this, the car needs to come back to the dealer in good condition and be within the agreed mileage. If you travel a lot and exceed your agreed mileage, you will need to pay additional charges.
- Can negatively impact your credit
As mentioned above, car finance can increase your credit score. However, if not handled correctly, it can have the opposite impact. Defaulting on your car loan or making late payments can have a negative impact on your credit file. This can lead to defaults on your credit file or a County Court Judgement against you.
Is car finance right for you?
Whether car finance is right for you or not can come down to your own personal circumstances. As mentioned above, car finance is never guaranteed so you may want to get pre-approved before you have your heart set on getting a car on finance. It’s also important that you can afford to pay your finance back.
Car finance is a legal agreement, and you are agreeing to make each payment, every month, for a number of years. If you know you can’t commit to this, then a car loan may not be for you. It can also be harder to get approved for finance with a low credit score. If you low credit due to missed payments and have high levels of debt, it may not be wise to take on more credit and you may not get approved.