Car finance deals are more popular than ever in the UK and it’s easy to see why. With the cost of new cars and used car the highest they have ever been, consumers are turning to more affordable ways of funding their vehicle. Car finance allows you to split the cost of a new or used car into monthly payments and then pay added interest to the finance company. Car finance can be confusing if you haven’t taken our finance in the past or if you’ve had a hard time getting accepted for finance. What should you know before you apply for car finance?
Types of car finance
Many people are still under the misconception that there is only one type of car finance agreement which fits all. However, this is not true. In the UK, the most popular way to fund a car is through a personal loan, Hire Purchase Car Finance or Personal Contract Purchase deal.
Personal loan
A personal loan can be used for pretty much anything and can usually be offered by a bank or building society. You can use an online personal loan comparison site to get the best deal for you. A personal loan usually has higher rates than other options, but this is because it is an unsecured loan. An unsecured loan doesn’t have anything against it for security. You get the money deposited into your bank account which you can then use to buy a car. You are then legally contracted to pay back the loan on time and in full till the end of your agreement.
Hire Purchase Car Finance
Hire purchase is an example of a secure loan as the value is secure against the car you get. This means that you won’t own the car until the end of the agreement and once all payment has been made. Hire purchase can have higher monthly payments as you are paying off the cost of the car with added interest. Hire Purchase car finance is one of the most straightforward type of car finance. There are no mileage or damage restrictions in a Hire Purchase agreement.
Personal Contract Purchase
Personal Contract Purchase (PCP) is like Hire Purchase but it usually has lower monthly payments. This is because you aren’t covering the full cost of the car and instead have 3 options at the end of your agreement. You can either hand the car back to the dealer and walk away, you can use the resale value of the car on another PCP agreement, or you can refinance the balloon payment and keep the car.
Get ready for credit checks
No car finance company can offer guaranteed car finance and will usually need to complete a credit check on your before getting accepted. If you have bad credit, then you may think you’ll not pass a credit check but there are many bad credit car finance companies who can help. Lenders want to be assured that you can be trusted to pay back your loan or finance on time and in full. They just want to take a quick look at your credit file before accepting you for finance. Most lenders will use a soft search credit check which is much more beneficial for applicants. A soft search credit check does not affect your credit score and is not recorded on your credit file. Making multiple applications for finance using a hard search in a short space of time can negatively affect your credit score.
Pass an affordability check
Many potential lenders will often talk about affordability but what does affordability mean? Many bad credit car finance specialists will also take affordability into account to get you approved if your credit score is a little on the low side. Essentially affordability just means what you can afford to pay for a car. Making sure you don’t borrow more than you can afford is crucial. Lenders will look at your incomings and outgoings to see if you can reasonably meet the repayment schedule.
Get your documents together
As mentioned, car finance lenders or brokers will require a few checks to get you approved for finance. They will usually ask for a copy of your driving license or proof of identity. You can also use a passport to verify your identity with some lenders. You will also need to provide 3 months’ payslips or bank statements to verify your affordability. Traceability is also important when it comes to car finance so many lenders will need proof of address history, they can use the information on the electoral roll to verify this.
Use a car finance broker
It’s still a common misconception that its easiest to sort your finance at a car dealership You see a car you like on their forecourt and then sort the finance. But what if you got your finance first? Using a car finance broker can be beneficial and can help you get the best deal. A car finance broker is essentially the middleman between you and the lender. You would apply online with a car finance broker and they do all the leg work for you and get you the best deal from a wide range of trusted lenders!