How to use car finance to boost your financial life

Most drivers now rely on some sort of finance or loan to help buy their next car. The cost of buying a new car with cash can be out of reach for many and spreading the cost with finance can be much more attractive. However, there are still many misconceptions around car finance and also the fact that it can’t be guaranteed to each and driver who applies for it. Car finance can help to make your next car more affordable and also improve your credit score in the process. Find out below how car finance can boost your financial life.

What is car finance?

Car finance can actually come in a number of forms and it’s just one type of agreements. In general, car finance is when a lender agrees to give you the money or pay for a car on your behalf and then you make monthly payments back to the lender over an agreed term. Some agreements may be unsecured or secured against the vehicle and may require a deposit contribution at the start. You can get finance on both new and used cars and it can be sorted through a broker or direct at the dealership. Car finance can be a really flexible way to get a car and can be tailored to suit your monthly budget.

Types of car finance agreement

As quickly mentioned above, there isn’t just one type of car finance agreement you can get, and you may be better suited to one form of finance than others. The most popular car loans in the UK are personal contract purchase, personal loan and hire purchase agreements. Each has their own structure and may not be offered to every applicant who applies.

Personal loan

A personal loan is an unsecured loan which mean the lender doesn’t own the property you buy. A loan can be used for anything you want, from a car purchase to home improvements, the possibilities are endless. A personal loan is when a lender agrees to give you a requested amount of money and deposits it into your bank account. You can then shop for your next car and buy it just like a cash buyer. You then make monthly payments back to the lender till the end of the agreed term.

Personal Contract Purchase (PCP)

PCP is one of the most attractive forms of finance as it gives customers more flexibility at the end of the deal. It’s a secured loan which means the lender owns the car during the agreement and you make monthly payments until the end of the agreed term. PCP deals tend to have lower monthly payments than other options because there is a large balloon payment to pay at the end of the deal if you wish to keep the car. If you don’t want to keep the car, you can hand it back to the dealer or use any positive equity in the deal towards another car on PCP.

Hire purchase

Hire purchase is similar to PCP but it’s a lot more straightforward. It’s a secured loan which means the lender buys the car on your behalf. The loan is split into equal monthly payments until the end of the term and once it’s ended, there’s just a small option to purchase fee. This fee is similar to what you have been paying monthly and lets you take ownership of the car at the end of the deal.

It can be worth exploring each car financing agreement in more detail to work out which would be best for your situation.

Can anyone get car finance?

In short, no, not everyone will be able to get a car on finance. Finance is always subject to status and each finance lender will have their own criteria in place. If you don’t meet this criterion, you may be refused a car loan. Getting credit for a car in the UK can be dependent on your persona situation and your circumstances. Lenders may want to know things like your credit history, living situation, income, employment status before they consider your application. If they feel you aren’t a suitable candidate for finance or would struggle to pay back your finance, your application may be rejected.

If you have been refused a car loan, you can ask the lender on what basis you were rejected and for supporting information to better your chances when applying again.

Do you need a good credit score?

One of the main factors potential car finance lenders look at is your credit score. This is because your credit score is a great indicator of how good you are at managing credit or finance. A good credit score indicates you can be trusted to pay back your loans on time and in full, based on your previous credit behaviours. A low credit score can be impacted by things like bankruptcy, missed payment, high levels of existing debt, defaults, or late repayments.

It can be possible to get a car loan with bad credit, but you may not get the best deal or be refused by a few lenders along the way. Usually, lenders reserve their best and lowest finance rates for people with the best credit scores as they are less of a risk. If you want to make your car finance deal cheaper, you could consider improving you credit score before you start applying for a car loan.

How to boost your credit score with car finance

Many people think getting a car on finance is bad for your credit score, but this is only strictly true if you mishandle your deal. When you first get accepted for finance, it increases how much money you owe out and can take an initial hit on your credit report. However, once you start paying off your deal each monthly your credit should return to normal.

Your credit score can only be negatively affected by car finance if you fail to make your payments on time and in full. If you’re worried about missing payments, a direct debit and ensuring you have enough money in your bank is the best way to keep on track. When used correctly, a car finance deal can actually help to boost your credit when you make these payments, an any other financial commitments you have too.

Make your money go further

One of the biggest benefits of getting a car on finance is the ability to spread the cost. When you buy with cash, it can be hard to save up one lump sum to pay for the car you want but using a loan or finance can help you get a newer, and better car. You can choose a loan which suits your budget and a change the term length to fit in with your affordability. Car finance also works great on brand-new cars and who doesn’t love that new car smell? Many manufactures can offer 0% interest on new cars too, but it may be reserved for the best credit scoring candidates only.

Let a broker get you the best deal.

When you apply for a mortgage, you wouldn’t apply straight away with the lender and instead would use a broker to help you. The same goes for car finance, even though many people are still applying for finance at the dealership. Car dealers usually only have a limited number of lenders to offer you finance and it may not be the best deal for your situation. A car finance brokers works on a commission basis and is usually free to use to the customer. They can help to introduce you to a trusted lender from their wide lending panel. This means you can compare multiple finance packages at once and get the lowest rate deal for your situation.

Put down a deposit to get a better deal.

Often, drivers are hunting for no deposit car finance deals as they don’t have money to put down at the start. However, a larger deposit contribution can be beneficial to you. When you put down more money at the start of the deal, you are reducing the loan amount. A smaller loan then makes it easier to pay off and can even lower your interest rate offered and your monthly payments! Some car finance agreements require a deposit in order to be secured too so it’s worth keeping in mind before you start applying!

Part exchange your car and get a cheaper deal.

If you’re finding it hard to save up for a car finance deposit, you could also consider using your current car as a part exchange. Part exchanging your car at the dealer is an easy and hassle-free way to get rid of your old car and put money towards your next, new car. You can use the value of your car (based on the dealer’s valuation price) to offset the price of the car you are buying and saves you time when it comes to selling your old car!

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.