Getting a car on finance means you can spread the cost of owning a car. Many people choose to finance their next car as it enables them to get a better car then they would with cash and pay it back over a number of years. Many car finance agreements last between 1-5 years but some agreements can even be spread over 7 years.
If you’re looking to buy a car on finance, you may be wanting to get the lowest monthly payments possible. if you’ve never taken out car finance before you may want some advice on how to lower the cost of your finance deal. There are a number of factors that can make financing more expensive and it’s important that you consider each before you start applying. Let’s take a look at the factors which affect the cost of car finance below.
Loan Amount
The amount you want to borrow for car finance can determine how much you need to pay back. The more you lend, the higher your loan amount and monthly payments will be. Brand new cars tend to be the most expensive but tend to more modern, better technology and improved safety features.
New cars can also benefit from 0% interest rates which can save you money in the long run. If you are looking to keep costs low, getting a used car may be better for you. If you’re not sure how much you want to borrow, you can use a car finance calculator to get an idea of how much you could borrow based on your credit score and monthly budget.
Credit Score
It’s a common misconception that getting a car on finance with bad credit is impossible, however there are many specialist lenders who can help. In general, lenders tend to have easier acceptances and low interest car finance rates for people with better credit scores. This is because they are seen as less of a risk and usually have a good track record of making repayments on time and in full. If you’re looking to get a car on finance and are worried about getting approved or the interest rate you may be offered, you could consider increasing your credit score before you start applying.
Deposit Contribution
Putting more in for car finance means you don’t have to borrow as much from the lender and can make your loan amount smaller. It’s worth noting that some car finance agreements such as hire purchase can require you to put down a deposit before you can secure the deal. Having a deposit works to your advantage as it can help to increase acceptance rates, lower your monthly payments, and reduce the amount of time it takes to pay your loan back.
Length of Loan Agreement
As we mentioned earlier, you can spread car finance agreements over 1-5 years. The longer you take to pay back your loan, can lower your monthly payments but you can pay more overall in interest and additional fees. Paying off your loan quicker can help to reduce how much interest you pay but can increase your monthly payments. It’s important that you can afford to meet each payment every month so you should try to take out a loan with affordable monthly payments but with the shortest term possible.
Interest Rate
Your interest rate on a car finance deal reflects the rate of borrowing. Your interest is essentially how the lender makes money by loaning you the money to buy a vehicle. Interest rate is calculated by a number of factors and as a percentage of the value of the loan. The higher your interest rate, the more you will pay back overall. Factors that can increase your interest rate can include a longer loan term, higher purchase price of the vehicle, a higher residual value of the car and a bad credit score.
Type of Car Finance Agreement
In the UK, there are different car finance options available. Hire purchase, personal loans and personal contract purchase tend to be the most popular.
You may be more suited to one car finance agreement than others. If you have a good credit score, personal loans can be the cheapest and most straightforward way to borrow money. Hire purchase and PCP deals are forms of secured loans which means the lender owns the vehicle throughout the term.
This can make it easier to get approved with bad credit as the lender has the right to take the vehicle away from you if you fail to pay. Acceptance rates, monthly payments, and interest rates vary for each agreement so it’s worth doing your research first before you commit to one. Additionally, if you are considering a PCP agreement, it’s important to understand the terms and conditions, including how to make a PCP claim if necessary, to ensure you are fully aware of your rights and obligations.
This can make it easier to get approved with bad credit as the lender has the right to take the vehicle away from you if you fail to pay. Acceptance rates, monthly payments and interest rates vary for each agreement so it’s worth doing your research first before you commit to one.