The UK car finance industry is more popular than ever. With so many people in the UK choosing to get their next car on some sort of credit or finance, is car finance right for you?
There are common myths around car finance deals which may put some people off, but the car finance industry has grown massively in the past 10 years and car finance is now more accessible for people with different circumstances. Many people also believe that there is only one type of car finance, however, there are three main type of car finance agreements that are the most popular in the UK!
Uncertainty also comes with how car finance affects your financial credit score, and many people believe that car finance will harm their current score, however this is strictly not true! So, how do you determine if car finance is right for you?
Types of car finance
There are three main types are car finance available in the UK. There are also a few more worth looking into but Personal Loans, Personal Contract Purchase and Hire Purchase agreements tend to be the most popular. They are all similar in a way as they all include making a monthly payment to an agreed fixed term with interest. However, some have more flexibility than others, and ownership of the car can depend on the type of finance agreement you choose. Let’s take a look at each.
A personal loan can be used for just about anything and is a great way to fund your next car. Personal loans are usually offered by banks, building societies and finance lending companies. Because you get the total amount deposited into your bank account, you can buy the car outright and become the automatic legal owner of the car! You then make fixed monthly payments to an agreed term with added interest. Interest rates on personal loan options tend to be lower than other finance options.
A Hire Purchase agreement or HP agreement is pretty self-explanatory. You are essentially hiring the car over a fixed term and then once all the payments have been made you purchase the car! Hire purchase agreements can be offered by car dealerships and online car finance providers. Usually within hire purchase agreements, you put down a 10 per cent deposit, however there are many no deposit car finance options available. You then make monthly payments to a fixed term and then once the final payment has been made, you become the automatic owner of the car!
Personal Contract Purchase
This type of finance agreement is similar to Hire Purchase. You make monthly payments to a fixed term and don’t own the car until the end of the agreement. You can also put down a 10 per cent deposit or there are no deposit options too and you are usually offered a PCP deal from a car dealership or online finance providers. At the end of a PCP agreement you have three options, you can either hand the car back to the dealer, pay the resale value and keep it, or use the resale value towards buying a new car.
Credit score and car finance
When applying for car finance, your credit score is really important. Potential lenders will usually use a soft search to check your credit file, which doesn’t harm your current credit score and won’t leave a mark on your credit file. It gives them an indication of how good of a candidate for finance you are and your borrowing history. Having a low credit score can make it harder to be accepted for car finance but not impossible. Having bad credit is usually caused by missed or late payments in the past and this makes you more of a risk to potential lenders.
Having bad credit may result in higher interest rates but there are many options available today for people with different circumstances. If you are worried about applying because of bad credit car finance, there are a few easy ways in which you can improve your credit score to increase your chances of being approved for car finance.
- Pay all your bills on time. This one may seem really obvious and it may be difficult if you have had trouble in the past making repayments. However, even a few months’ worth of paying all your bills on time and in full can soon increase your credit score.
- Register on the electoral roll. Many people overlook this as a way to increase your credit score. The electoral roll enables lenders to see your address history, how long you’ve been there and verifies you are who you say you are. Lenders tend to favour applicants who seem more stable and don’t move around as much too.
- Don’t make multiple applications. As mentioned, when you apply for car finance lenders will check your credit file to get an indication of how likely you are to make your payments on time and in full. Some lenders may provide a hard search on your credit file which allows them to see your full credit history and this is recorded on your credit file. Multiple hard searches on your credit file can hinder your current credit score and it can also indicate to potential lenders that you are desperate for credit.
Work out your monthly budget
When considering car finance, you should also consider your monthly budget. Car finance is a great way to spread the cost of owning a car into affordable monthly payments. However, when you consider a car finance agreement and how much you can spend, you should also consider the additional costs that come with owning a car. For example, you should factor in the cost of car insurance, road tax, fuel costs, annual MOT, servicing and maintenance, breakdown cover and more! Don’t let that put you off though, you can use an online car finance calculator to work out your monthly budget! You can find out how much you could borrow before you even apply for car finance and then factor in your additional motoring costs.