Car loans & Vehicle financing in UK

Car loans & Vehicle financing in UK
Car loans & Vehicle financing in UK

When it comes to financing a vehicle we all know it’s a big financial responsibility.

So naturally we’re all after the best deal and the best way to find it is by shopping around.

You should visit the banks, dealers and alternative online financial service providers so that you can have a variety of options to choose from.

Additionally, you should get your hands on your credit report and review it for any errors that have a negative impact on your credit score. When you visit any dealerships to arrange financing take your credit report with you – it will show that you know what you’re talking about and get you off on the right foot for some fair negotiations.

If you can pay cash for the car – by using your savings you will save a lot money by avoiding having to pay any interest fees and you may also receive a decent discount for an upfront payment but, unfortunately most of us don’t have that kind of cash in hand. Even those with savings will generally avoid having to use their savings since cash emergencies always happen and this will put them in a very bad situation.

Generally you will be paying a lot more interest on your car loan then you would be generating interest from a savings account, so if you have additional financial resources available such as an emergency savings account – then buying cash is definitely you’re best option.

If you have savings but not enough to buy the car in full then you may want to consider putting up a big deposit – you will help lower the interest rate which will also save you a lot of money.

Choosing a car is usually the fun part but securing the financing is often times a nightmare particularly for those who have poor credit scores. If you have a bad credit score than using your savings will also make a lot more sense because you'll be subject to a higher interest rate than those with a good credit score.

Buying a car cash, is the best way.

As mentioned, buying a car in cash is the most superior method since you won’t be paying any interest to a lender and you'll own the car but the reality is that that’s simply not possible for most. This is why most people finance their cars through a bank by way of a personal loan which they then can pay-off in more affordable monthly instalments over a set period of time. The benefit of this type of vehicle financing is that the monthly instalments tend to be lower than that you'll incur from almost all other types of online loans and you’ll own the car the minute you’ve made the payment which means that should you fall into some financial trouble you can sell the car and hopefully repay what’s left of the personal loan as well as get yourself out of the trouble you're in. The problem with this is that because vehicles are subject to sever depreciation, by the time you’ve paid off the loan on the car – it would have depreciated in value well below the amount you’ve paid for it.

What you need to know.

On the other hand many dealerships will have you enter into a hire purchase (HP) agreement which means you don't own the car until the last payment has been made – so if you don't make the payments you'll lose the car and the money you’ve paid for it up to that point and they may take action against you to recover more money. Hire purchase agreements have fixed interest rates and are probably the third most common FINANCING method in the UK – it’s simple and effective but you will have to pay a deposit of at least 10%.

Once you’ve paid the deposit you will make monthly instalments just as you would with a personal loan from a bank but as mentioned since you don’t really own the car until the last payment has been made you have no legal right to sell it. A very similar financing option to the HP is the Personal Contract Purchase (PCP). A PCP is the same as the HP option in that you have to pay a deposit and will make monthly instalments for the loan period which is generally between 12 and 36 months as well as a fixed interest rate. Where a PCP differs is that you may return the car to the dealer, trade it in for a new vehicle or keep it.

Remember that with both PCP financing option your millage will be restricted so if you go over the set limits or have damaged the car you may not be able to return the car at the end of the loan term. Many people prefer a PCP over an HP because of the flexibility it provides at the end of the loan term and instalments are slightly lower.

If you choose to pay the loan back over a longer period of time – you will end up paying more interest but if you can afford a higher monthly payment always opt for the longer term to ensure you don't fall behind on payments and lose any collateral you’ve put up as well as lower your credit score. This is very important if you're looking to purchase a home in the near future and need to have the best credit score possible.

Get vehicle financing with a bank.

You may want to visit the bank and get a representative to go through the loan process and help you figure out how much you can afford.

You may want to get pre-approved and then shop for a car based on the amount the bank has agreed to lend you. This is generally the best way to go about financing a car because it will spare you the trouble of having to be turned down and then go out and find another vehicle that you can afford payments on.

Banks will not put a lot of sales pressure on you like dealers do and they will almost always tell you if the car you intend on buying is overpriced – so it’s a safer choice for first-time buyers who are more susceptible to scams and hidden fees.

Additionally when financing a car through a bank you will be paying simple interest which means you'll pay an equal amount of interest throughout the loan term. This is not always so with dealers who tend to offer front loaded financing options which will mean you'll be paying a lot more interest in the beginning that at the end of the loan term – so if you want to pay it off early you'll lose money.

In summary if you want to own the car, pay only a minimal deposit, avoid any mileage restrictions and you’re not interested in trading it in too soon then a personal loan from the bank is a good place to look.

Try getting your car financed through the car dealer.

The second option that is best for those with a bad credit rating is to simply finance the vehicle through the dealer. Contrary to popular belief dealers do in some cases offer highly competitive rates and are sometimes the only option for those who do not meet the strict requirements of the bank. This can be in the form of 0% interest or low APR rates – if you’re patient enough to educate yourself and keep a good lookout for any deals it will be well worth it.

It also generally a faster process and you'll be driving your new car before you know it!

In either case it’s important that you understand that the rate the bank or another loan provider offers will depend on your credit score – so if you have a poor credit score than you're probably more likely to get approved by a dealer with a lower rate then you’d get at a bank anyway.

Another factor is the term of the loan – the shorter the term the higher the interest rate. Pre-owned vehicles will also always have a higher interest rate than new vehicles – not to mention higher insurance rates.

So is buying a second hand car worth it?

It’s been estimated that in the UK used car sales are three times higher than that of new car but the answer to whether a new car makes better financial sense depends entirely on what kind of deal you can get your hands on. Some car manufacturers may have a certain model that’s not selling so naturally they’ll be keen on moving the stockpile – so they offer very competitive discounts on these vehicles - you may even pay less than you would on a second hand car.

Additionally a new car usually comes with a standard warranty.

The difference with pre-owned vehicles is that the deposit required is usually significantly lower but at the same time the monthly instalments and insurance will be higher. The pros of buying a used car are that you won’t experience the extreme depreciation that new cars do. This depreciation can be as high as 20% once the car has left the showroom and within 3 years the car will be worth less than half of what you paid for it. This is a particularly expensive situation if you like to upgrade and change your vehicle quite often. The best place to find a good deal on a used car is at an auction where prices are slightly lower than that in dealerships.

Most traditional lenders, such as banks, will require both a good credit score and collateral on the loan (such as your home) – not a good situation to be in if you can’t make payments because you'll lose your home. As a general rule the better your credit score the better the offer you'll receive and the higher the chances of the loan request actually being approved.     

In summary buying a car cash is your cheapest offer and a personal loan will be the cheapest way to buy a car through finance. If you want a simple way to compare various deals instantly you could use an online comparison site – they’re simple to use and fairly accurate. By comparing the APR (annual percentage rates) you’ll be able to accurately determine which deal is the best. If the APR isn’t stated upfront simply ask for it as it’s almost impossible to make a good decision without it. Also compare the monthly repayments you’ll be making as well as the total amount you’ll be paying the loan provider.

So let’s look at your options if your credit score is poor. You need to take a look at your credit report and ensure that no errors have been made. Once your satisfied that the report is a true and accurate representation of your credit history you can then begin to remedy the problem. Firstly, you can try to remedy you credit score by reviewing the items that are having a negative effect – then one by one try to eliminate them. If you’ve missed payments – catch up. Another option is to pay a deposit on the vehicle, the bigger the better because it will help get you approved. You could also consider a joint application with a family member or spouse that has a good credit standing. Banks are very unlikely to finance you with a bad credit score so you will have to consider alternative lenders that does not have very strict lending criteria – as mentioned above dealers are not always a bad option and they’re probably much more likely to finance your vehicle when you have a poor credit score.

If you’re unfortunately currently bankrupt – neither traditional nor alternative loan providers will be able to finance your vehicle but they will consider you after you’ve been cleared of bankruptcy for at least 12 months. Remember when deciding on the loan term don’t be tempted to over-extend it because you’ll be paying a lot more in exchange for the smaller monthly payments.

You should only consider financing through a dealer if you’re willing and capable of negotiating and shopping around for deals – if you have little or no experience with cars – rather go through the bank.

Another option to finance your vehicle is by credit card which could give you a rather lovely interest-free period and a big bonus to paying by card is that the company you’re banking with shares the responsibility of the purchase so you will be able to get a refund should you have a problem with the car.

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