Getting a car on finance can be a great way to spread the cost of owning your next vehicle. You can choose a loan term that suits you and make monthly payments that fit in with your financial budget. For many people, car finance is a cost-effective way to get a car and either keep it at the end of the deal or hand it back to the dealer, depending on which type of agreement you choose. But how do you save money on your car finance deal? The guide below looks at 5 factors you should consider before you apply for finance.
How does car finance work?
Car finance is a process that allows you to borrow money from a trusted lender to fund your car purchase or borrow an amount that equates to the value of a car of your choice. You then make monthly payments till the end of an agreed term. Once your car finance deal has ended, you have different options depending on the type of car finance agreement you choose.
Types of car finance
In the UK, there are 3 types of car finance agreement which tend to be the most popular.
A personal loan can be used for anything, but it can also be a cost-effective way to get a car. You borrow a set amount from a lender and if approved, the money is deposited straight into your bank account. You can then buy the car you want from a car dealer or a private seller and be the automatic owner of the vehicle as you have bought it just like a cash buyer. Once the loan term has ended and all payments have been made, there’s nothing else left to do!
Hire purchase is a form of secured loan which means the lender owns the car throughout the agreement until the final payment has been made. The value of your chosen car is split into equal repayments with interest and the term can be spread over 3-5 years. Hire purchase can have more expensive monthly payments than other options as the value of the car is split into equal payments but it can be a good option for those with bad credit as the lender owns the car throughout and can use it as collateral if you fail to repay.
Personal Contract Purchase
Personal Contract Purchase (PCP) is a form of hire purchase. However, instead of splitting the value of the car into equal payments, much of the value is differed until a final balloon payment. If you wish to keep the car, you will need to pay off the final payment first. If not, once all payments have been made, you can simply hand the car back to the dealer or use the value towards another car on finance.
How to save money on car finance:
Car finance rates can vary based on a number of different factors. However, there are a few things you could consider doing before you start applying for finance to help save you some money.
1. Improve your credit score.
Your credit score is really important when it comes to car financing. Lenders use a credit check to see how you’ve handled credit in the past. Bad credit usually indicates missed or late repayments in the past which can make you more likely to default on your finance or loan again. If you have a low credit score, you should try to improve you credit score before you start to apply for finance to help increase the likelihood of approval and also can help to get you a better interest rate.
2. Put down a larger deposit.
Car finance agreements such as hire purchase and personal contract purchase can benefit from lower monthly payments when you put down more money at the start of your deal. A bigger deposit reduces how much money you have to borrow from the lender and makes your loan amount smaller. A smaller loan amount can then be cheaper and more manageable to pay.
3. Lower loan amount
By choosing a smaller loan amount, you can help to make your car finance deal cheaper and also increase your chances of getting approved. When you have a low credit score, it can be more of a risk to lend a larger loan amount. Instead you could consider used cars with bad credit as they are usually cheaper and can mean you are lending a smaller amount.
4. Choose a shorter term.
When you take out a car finance deal, you can choose a term that suits you. It can seem attractive to spread your car finance over a number of years and the longer you take to pay your finance back, the lower your monthly repayments will be. It’s important that your car finance deal fits in with your budget however, by choosing a longer term, you are increasing the length of time you are paying interest and it can affect your interest rate offered. Where possible, you should try to choose the shortest finance term you can. Doing so can help save you paying more than you need to in interest.
5. Compare lenders.
When you’re shopping for car finance, it can be tempted to jump at the first finance approval you receive, especially if you have bad credit. However, it can be much more beneficial to compare a range of lenders first. To help protect your credit score, you could also consider using a car finance broker as they can do this on your behalf. They have access to multiple lenders and can help select the lowest finance package for your circumstances. You then have the freedom to get the car you want from a reputable dealership.