If you’re in the market for your first car or haven’t had a car on finance before, you may be wondering if it’s worth it. Car finance can sometimes be confusing and it’s hard to know if you’re getting the best car finance deal possible. The guide below has been designed to explore the benefits of getting a car on finance and how it can benefit your life. We also consider a few factors which you should think about before getting a car on finance so you can make an informed decision. Let’s take a look.
How does car finance work?
Car finance is when a consumer borrows money from a finance lender to fund their car purchase. The customer then pays back their finance in deal in monthly payments with interest included till the end of an agreed period. Car finance agreements can last anywhere between 1-7 years, depending on the type of agreement you choose. You can also choose whether you own the car or not. You may be suited to one type of car finance agreement than others so it’s worth exploring each in more detail before you start applying. You can obtain finance deal from a bank, building society, car finance company or finance brokers.
Why should you take out a car finance deal?
There are so many benefits to getting a car on finance; you can spread the cost, get a better car, and use it to improve your credit score.
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Spread the cost
One of the biggest benefits to getting a car on finance is being able to spread the cost. Many people don’t have the cash to hand to purchase a car outright or may not want to spend their savings on a car – this is where car finance comes in to play. You can pay your finance deal back over a period that suits you and don’t even have to own the car at the end of the agreement if you don’t want to.
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Get a better car
When you get a car on finance, you can usually get a better car than you would when paying with cash. Car finance enables you to get a new or used car and pay for it over a set period. Many people can benefit from low monthly payments on a brand-new car through agreements such as PCP. Within a PCP deal, you only pay back the cost of the depreciation while you use the car so monthly payments can be much more affordable than other options and you could get a brand-new car!
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You don’t have to own the car
When you get a car on finance, you can choose whether you want to own the car or not. Personals loans aren’t secured against the vehicle, and you borrow a set amount to buy a car from a private seller or at a dealership. This means you can be the owner of the vehicle from the start. Other agreements such as hire purchase or PCP have options as to whether you purchase the car or not at the end of the deal. Hire purchase final payments can be similar to your monthly payments but PCP usually involves a large balloon payment to keep the car.
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Improve your credit score
It’s a common misconception that getting a car on finance can damage your credit score. However, when used correctly, your car finance deal can help to increase your credit score. By meeting all your car finance payments and any other financial commitments, you can start to rebuild a low credit score and show lenders that you can handle credit responsibly.
Factors to consider before getting a car on finance:
There are plenty of benefits to getting a car loan above but there are a few things you should be aware of before you sign on the dotted line.
Affordability
When you apply for a car on finance, you will usually be asked to prove your income. Your income reflects how much you can afford to pay for finance each month. Car finance is a legal agreement and failing to pay can lead to serious financial implications. It’s important that you know you can meet every monthly payment right up until the final payment. If you’re not sure what type of loan you can afford, you could use a car finance calculator to see how much you could borrow based on your monthly budget and credit score. This can give you a more accurate insight into the type of cars in your budget.
Credit situation
Car finance lenders will usually want to know how you’ve handled credit in the past and they can do this by checking your credit report. People who have missed payments can be seen as more of a risk as they are likely default on their finance again. The lowest car finance rates can be reserved for people with better credit scores as they are likely to have a strong history of meeting payments on time in full. If you want to lower your interest rate offered, you could consider repairing your credit score before you start applying.
Other costs associated with owning a car
Your car finance deal can make owning a car more affordable, but you should also consider the other costs involved. In the UK, it is a legal requirement to have a car insurance premium in place for any car used on the roads. Car insurance rates can vary massively depending on a number of factors so it important to compare premiums before you get a car. You will also need to pay for the car to be taxed each year, have a valid MOT certificate, and pay for any repairs or servicing costs.
