Car finance is a popular option for those looking to purchase a new or used vehicle but without the full upfront cost. Whether you are a first-time buyer or looking to upgrade your current ride, securing car finance can provide the flexibility to pay over a set period. However, before you apply for car finance, there are several essential steps to ensure you get the best deal and avoid financial strain in the future. Here are the five must-do things before applying for car finance:
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1. Check Your Credit Score
Your credit score is one of the most critical factors that lenders will evaluate when deciding whether to approve your car finance application and what interest rate to offer. A higher score generally means you are considered a lower risk borrower, which can help you secure a better deal.
What to do:
- Obtain a free copy of your credit report from agencies like Equifax, Experian, or TransUnion.
- Review the report for errors or inaccuracies and dispute any discrepancies.
- Take steps to improve your score if necessary, such as paying off existing debts or reducing credit card balances, before applying.
A good credit score will increase your chances of securing more competitive loan terms, such as lower interest rates or higher loan amounts. You could still finance a car with a bad credit score but you may not get the most competitive rates.
2. Determine Your Budget and Loan Affordability
Before applying for finance, it’s crucial to understand your budget and how much you can afford to borrow. It’s not just about the monthly payment but the total cost of the loan, including interest and fees. Overstretching your finances can lead to stress and repayment problems down the line.
What to do:
- Set a realistic budget based on your monthly income and expenses.
- Factor in the cost of insurance, maintenance, and any other expenses related to car ownership.
- Use an online car loan calculator to estimate monthly payments for different loan amounts and terms.
Knowing your budget helps you avoid the temptation to purchase a car that’s out of your financial reach.
3. Research Different Car Finance Options
There are several car finance options available, each with its own advantages and disadvantages. Understanding these options will help you choose the one that aligns best with your financial situation and goals.
What to do:
- Hire Purchase (HP): You’ll make monthly payments for the duration of the loan, and once the final payment is made, you own the car.
- Personal Contract Purchase (PCP): You pay lower monthly payments, with the option to make a large final payment (balloon payment) to own the car or return it at the end of the term.
- Leasing: A rental arrangement where you pay for the use of the car for a fixed term but never own it.
- Personal Loan: You borrow a lump sum from a bank or lender to purchase the car outright, paying it back in instalments.
Each option comes with different terms, deposit requirements, and flexibility, so it’s important to consider your needs and future plans.
4. Save for a Deposit
There are some 0 deposit car finance deals but most car finance options require a deposit, typically ranging from 10% to 30% of the car’s value. A larger deposit reduces the amount you need to borrow, which can lower your monthly payments and the total amount of interest you pay over the life of the loan.
What to do:
- Save up for a deposit in advance. This could take a few months depending on your financial situation, but it will ultimately help you secure better financing terms.
- Consider trading in your current car to use as a deposit if applicable.
A substantial deposit can also increase your chances of approval, especially if you have a less-than-perfect credit history.
5. Understand the Total Cost of Ownership
Before committing to a car purchase, it’s essential to consider the full cost of ownership, not just the monthly finance payments. This includes fuel, insurance, taxes, maintenance, and repairs, all of which can add up over time.
What to do:
- Research the estimated running costs of the car you’re interested in, including its fuel efficiency and typical insurance premiums.
- Factor in any additional fees or charges that might arise during the loan term, such as early repayment penalties or charges for exceeding mileage limits in PCP agreements.
Knowing the total cost of ownership ensures that you’re not just paying for the car itself but also for its upkeep, helping you avoid financial surprises later on.