Car finance is a popular option for those that don’t have a lump sum to pay for a vehicle outright. And with a range of options, like hire purchase, PCP agreements, and even car finance bad credit, it’s easy to see why – but these options can seem overwhelming if you’ve never had to deal with car finance before. Below, we’ll take a closer look at some of the most well-known finance options, and a few factors to keep in mind to help you make a decision.
What is car finance?
Car finance options allow you to benefit from having access to a car without having to find the funds to pay for it outright. Car finance allows you to split payments up into more affordable amounts to be paid back to your chosen lender in monthly instalments, along with added interest. Here are a few of the most popular types of car finance you could choose from:
Hire Purchase: This type of finance typically requires you to put down a deposit for the car you’re purchasing. Then you will be required to pay back monthly instalments over an agreed term. You will not own the car until all payments have been made.
PCP: Similar to the above option, PCP agreements often mean putting down a deposit before you drive the car away. You will then be required to pay monthly instalments over an agreed period, and at the end of this term, you will have the option to pay a balloon payment to own the car, change the car for another and start a new contract, or simply hand the car back.
Personal loan: For this finance option, you will need to get a loan from your bank or other financial institution. This will be used to pay for the car outright, but you will then be required to pay back the loan in line with the terms set out with your lender.
Leasing: This is another popular option. Leasing requires you to enter into an agreement that means you’ll pay a monthly instalment to drive the car of your choice. Unlike the other options, you won’t own the car or have the chance to at the end of the agreement. This is a good option for those that enjoy changing their car regularly.
How to choose the best option for you
With so many options available, it can be difficult to choose which is best for you. Here are a few factors to keep in mind so you can make an informed decision.
Work out budget
Before you enter into any car finance agreement, you should make sure you work out your budget. To do this, look at your monthly income and outgoings, and decide how much you can realistically afford to spend in total on your finance payment. This can help you narrow down both a lender and the type of car you will be able to afford. It also means doing your due diligence to ensure you can manage the costs without falling into financial difficulty.
Consider interest rates and terms
The interest rates offered to you will increase the cost of your finance payments, so you must take this into account when applying for finance. Interest rates can be determined by a range of factors, including credit score and the term of the loan. Improve your credit score before applying and you may find you can benefit from more affordable rates. If you can, try and choose a loan with a shorter term, as this will decrease the overall cost of interest.
Research and compare
It’s essential when looking for car finance that you research and compare to find the best deal. Whilst it can be tempting to choose the first option you see that looks promising, you could be missing out on deals elsewhere online. Look at the total cost of the repayment including interest to help you make your decision. Researching and comparing can also be a good option if you’re heading into a dealership to negotiate, as you’ll already have an idea of what other lenders are offering, so you can use this as leverage.
The impact of your credit score
As mentioned above, improving your credit score before you apply can be helpful. Whilst there are lenders that can help those that may struggle to be approved for finance, with a range of options like car finance for bad credit and car finance on benefits, basing their decisions on affordability rather than past payments, improved credit can mean lower interest rates. Get to know your credit score before applying and take the necessary steps to improve this.