Taking out finance on a new car has been commonplace for many years. Rather than pay for the car outright in cash, many people choose to finance their vehicle purchases instead; especially as it can be more cost effective in the long run.
In recent years, financing the cost of a used car has also become increasingly popular for many buyers. New cars take their greatest depreciation hit in the first year to two years. So you can pick up a premium or prestige model for a lot less than you could drive one off a main dealer’s forecourt. Not only that, but with personal loans being pretty easy to come by, they can be a great way to fund the purchase of your new used vehicle. But before you commit to a specific finance option you'll need to think about budget planning and which finance option is best for you.
You can fund a premium used car purchase through dealer finance, PCH, Hire Purchase, or you can get a personal loan.
Getting a loan to buy a car can work out as one of the cheapest options; and they are relatively simple to arrange too. Here are the main things to consider when applying for a loan:
- Check your credit history
- Shop around
- What can you borrow?
- How do loans work?
- The pros of personal loans
- The cons of personal loans
First things first – make sure you are on the electoral roll and make sure all your bills and financial commitments tie in with your address. Lenders will check this.
You need to make sure that your credit rating is as good as it can be. Get a credit check from a credit scoring agency such as Equifax, Experian or Noddle. This won’t affect your credit score.
Then get your financials in order to improve your rating. Make sure your credit card payments are up to date and clear any existing loans. Also, make sure that any finance payments such as hire purchase agreements are up to date and that you continue to make your regular payments on them.
When you apply for loans, your credit score can be affected so check loan eligibility calculators on price comparison sites that offer soft searches on your credit history. These will not affect your rating.
Look around for loans with the lowest interest rates (APR). There are two kinds of personal loan; secured and unsecured. You can use collateral such as your home to secure a loan, which may get a better rate, but remember that your home will be at risk if you don’t keep up repayments.
Unsecured loans tend to be the most popular and will be a little more expensive than secured loans, but they are less risky. And they tend to be more relevant when buying a car too.
Your credit score may be affected if you are seen to be ‘shopping around’ for loans. That sounds unfair (and maybe it is) but that’s the way the system works. There are several price comparison sites including Lovemoney, Moneyfacts and Money Supermarket [Links] which can be a good place to check out the different rates.
When you have found a lender, get a quote from them before you apply for the loan. If they need to do a credit search, make sure that it’s a ‘quotation search’ so that it doesn’t show up on your credit file.
Find out how much you can borrow before you start looking seriously for your new car.
As part of the application process a lender will assess how much you can afford to fork out each month on repayments. This assessment will include taking a detailed look at your salary and any other income you receive. It will also look at your outgoings, including credit card and loan debts, household bills, childcare, travel and general living costs.
The assessment will also check to see how you would cope if the Bank of England was to raise interest rates.
It is not in the lender’s interests (or yours) for it to lend you more than you can afford to repay
Because a loan can be used to buy a car privately or from a dealer, it’s flexible and can be treated like cash as soon as it’s in your account.
They are repaid monthly, usually by Direct Debit. When agreeing the loan, as part of your agreement, they will set up a payment schedule with the bank so you’ll know exactly how much you’ll be repaying.
The beauty of a personal loan is that you own the car outright from the beginning. So, if you do wish to change your car or sell it, you can do so while you are still re-paying the loan.
- They’re easy to arrange
- You can use a loan for the whole cost of the car, or just for a part of it.
- If you have a good credit rating, you should get access to the best rates available which could make a personal loan cheaper than dealer finance. However, if there’s a 0% finance on offer it’s possible that that may work out cheaper.
- Check interest rates, they are normally fixed – although they can be variable, which will affect your monthly prepayments.
- You can choose the loan period (typically one to seven years). Longer loans mean lower monthly repayments. But remember, the longer the repayment period, the more you pay in interest overall.
- Monthly payments can be higher than other forms of finance, but this depends on the length of the loan and costs.
- You might have to wait a while for the funds to clear in your account.
- A lot of people can’t get the advertised interest rates, which are often referred to as ‘representative’ or ‘typical’ APRs. Having a good credit score will help, but it doesn’t guarantee you will get it.
- You own the car outright so you will be responsible for all repairs. This is not the case if you lease the vehicle for example.
- You might end up borrowing more than you planned. That’s because most banks won’t lend less than £1,000 or for less than 12 months. Interest rates might reduce the more you borrow offering a temptation to increase the size of the loan.
For more on financing the purchase of prestige used cars and the options that are available to you download our useful budget planning guide.