Are you considering purchasing your next car on finance? You are not alone! Many drivers are now choosing some form of loan or finance to help spreads the cost of their next car purchase. There are so many benefits of car finance, from affordable monthly payments which suit your budget, to getting a newer and better car than you would with cash. For many UK drivers, using car finance to get a vehicle is a no brainer but there are a few important factors you should consider first. The below considerations should be reviewed to help you decide whether finance is right for your situation.
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1. A low credit score makes finance more expensive.
If you’ve previously been declined a car loan, you may be already aware of how credit scores affect car finance. It can be harder to get approved for a loan with a low credit score and if you are one of the lucky ones who get accepted, you will usually get offered a higher interest rate. A higher rate of interest makes the cost of borrowing more expensive and it may result in your finance not being as cost-effective as it could be. Before you jump into car finance, it can be worth assessing your current credit situation and making improvements where possible first.
2. Smaller monthly payments may not be the cheapest.
Car finance agreements such as PCP can be attractive as they tend to offer monthly payments. Even brand-new cars can be finance with affordable payments which can be cheaper than other options. However, PCP agreements can only offer these low payments because they hold off much of the value of the loan until a final balloon payment. This balloon payment needs to be paid if you wish to own the car at the end of the deal. If you don’t you can simply hand the car back to the lender with no more payments to be made.
3. Secure finance first and shop for the car after.
For many drivers, this process may seem a little backwards but sorting your finance first can be very beneficial. You can get an instant decision for car finance and see the likelihood of being approved before you even step foot in the dealership. Using a car finance broker can help you to find the best finance deal for your circumstances by comparing a wide range of lenders at once. A broker works on behalf of the customer to find the best deal from their panel. They are usually free to use and instead charge the lender a fee for the introduction.
4. Get insurance quotes for cars in your budget.
When you’re considering how much your next car will cost you, it’s important you factor in the cost of car insurance too. Every UK driver needs a valid car insurance policy in place, or they can face an unlimited fine or disqualification from driving. Different cars will be more expensive to insure, and costs can be higher for those who have recently passed their driving test. It can be worth comparing insurance costs and getting some quotes before committing to get a car on finance as it may increase your monthly budget massively. You will also need to think about the running costs of owning a car too such as fuel costs and MOT/servicing.
5. Know what to do if you can’t afford to pay.
Whilst you should never enter into a car finance agreement if you know your circumstances are going to change in the near future, sometimes it can happen unexpectedly, and you may find yourself in a position where you can no longer keep up with your payments. If this happens, the first thing you should do is contact your lender to ask for the best advice. Depending on how far you are into your agreement, there can be different options such as ending your agreement early, refinancing your current loan to smaller payments or handing it back to the dealer.