5 Things You Need To Know About Car Finance
Many people need a new car but can’t afford the total amount straight away. Car finance allows you to buy a brand-new or used vehicle and pay it off monthly. There are a few options, like a hire purchase, where you never own the car outright, or 0% finance, which involves a deposit. But all options allow you to use or own a new car while paying for it in manageable chunks.
Difference sources offer car finance, such as car finance companies, building societies, banks, and other lenders. But there are many other essential aspects of car finance before agreeing on a contract between yourself and a lender.
What exactly is car finance?
Car finance is the system lenders use to loan consumers money to hire or purchase a car over a certain period. The agreement process involves the application, then if you are approved, repayments which include interest. One plus is that car finance is easier to get than a bank loan, as some specialist lenders offer options for people with poor credit histories.
Agreements often start at 12 months but can go up to seven years to allow for smaller payments over a more extended period.
Most types of car finance have heavy penalties for missed repayments, so it’s essential to plan before committing to any car finance plan.
What different types of car finance exist?
It can be easy to get confused with all the different ways lenders describe car finance. Personal Contract Purchase (PCP) and Hire Purchase (HP) are a few common examples.
Another type of car finance is a personal loan, which you apply for through a bank or building society. You then use this money to pay for the car and pay back the money to the bank. Personal loans can come with lower interest rates depending on your credit rating.
Leasing is similar to PCP but without the opportunity to buy the car at the end of the agreement. It’s essential to read all the small print for ‘wear and tear’ before signing a lease agreement, as it can lead to high fees.
Dealers usually use 0% interest agreements for poorly selling or older models. 0% agreements involve zero interest but a high deposit, often at 35%. Missing payments can result in interest rate increases.
How are PCP and HP different?
PCP is one of the most popular forms of car finance due to its flexibility. For PCP, you pay a deposit and monthly amounts with a larger payment at the end of the agreement if you want to own the car outright. PCP also allows you to trade the vehicle for a different model at the end of the contract.
HP is similar in some ways to PCP but with stricter rules. Like PCP, HP involves paying a deposit and monthly repayments. At the end of the contract, there is an option to buy the car for an ‘option to buy’ fee of £100-£200.
However, HP has many rules about the car’s condition when you return it. You can be penalised with fees for minor vehicle marks or over the agreed maximum mileage. The lender will reclaim the car if you miss payments with an HP agreement.
Are extended car warranties helpful in finance?
That’s a tricky one. Most extended warranties are not the same, and the details vary greatly. Always carefully read the small print of agreements for extended warranties to ensure you get what you expect. Whatever the cost, the fact remains that higher warranty fees mean better coverage for replacement parts or damage.
Warranties can vary, so ensure you ask as many questions as possible before committing to any warranty option. Also, consider what type of cover you need, so you aren’t overspending or undervaluing the necessary cover.
Always ask when buying a used car if there is some warranty remaining, as this can save money and the hassle of purchasing a new cover.
What can you do if a lender rejects you for car finance?
Although certain forms of car finance, such as hire purchases, are relatively new in the finance world, the systems used for borrowing and lending are old-fashioned. Don’t worry too much about being declined when applying, primarily online. The most common reason is that the system picks up small mistakes and denies the application from moving forward.
Another common reason for being declined is the way that lenders use applicant profiles. The details of these profiles are precise; if you don’t fit the criteria, the system may reject you. But this does not mean you should give up. Calling the lender up to enquire about this is an excellent way to sort it out and enable a second application.
Other reasons include new or unpredictable work situations or affordability concerns resulting from existing debt. Some specialist lenders offer bad credit car finance for people in this situation.
It is not always easy to get a clear answer about why a lender rejected you, but don’t let this dishearten you. It may not be a direct representation of your credit history. And if it is, there are options for consumers in that situation to use finance still.
Final points to consider
On the surface, car finance is an exciting way of driving a new car the same day you see it. However, interest, missed repayment consequences, and damage to the car are only some points to consider before committing.
You must consider many other aspects before agreeing to a car finance plan.
The first action when planning car finance is to work out if you can afford the monthly repayments. Don’t forget to factor in your intended monthly mileage and if this fits with the agreed maximum mileage stipulation.
It’s also crucial to remember to factor in all the items people often forget. You associate fuel costs, insurance, breakdown cover and other fees with your current car.