Purchasing a car can be confusing. Even when you have decided the exact make and model you want, the various financing options and requirements can make the whole process feel long and laborious.
The advantages of buying a vehicle on finance are clear. Instead of paying a large lump sum, you can spread the costs and tailor your payment plan to suit you, meaning you can get the car you want without delay. More and more people are choosing to buy through financing options, with the BBC reporting that over 75% of customers in the UK chose to buy through finance in 2014.
But in order to ensure you are getting the best deal, you need to have a good understanding of all the different options available to you. That’s why we have put together this handy financing guide, to help you find the right plan for you.
What are the best options for financing a brand new car?
Owning a brand new vehicle is always a temptation. They are often more reliable, cheaper to run and offer better longevity than their older counterparts. However, they do come with a much bigger price tag. Here are some of the best options on how to get all the benefits of a new car in a flexible and affordable way.
Leasing is a good option for customers who don’t want the hassle of owning a car. All you have to do is choose the new vehicle you want, state how long you want it for and declare your estimated annual mileage. The dealership will then use this information to calculate how much your monthly payments will be. These are typically between £100 and £400.
With this option however, there are extra charges for exceeded mileage and any maintenance that the car requires at the end of the agreed term. Some schemes allow you to pay extra on top of your payments to cover these maintenance costs, but you will still need to ensure that the vehicle is clean and undamaged throughout the duration of your contract.
Additionally, you will have to to take out comprehensive insurance. This can often end up being costly for more expensive models of car. This means that the total costs can stack up, especially seeing as many leasing contracts require you to pay a few months’ of payments in advance. You also won’t have the option to sell the car once you are done with it, as it must be returned to the dealership.
If you can afford a large deposit on a new car, then this option will typically work out cheaper in the long term. A significant portion of the car’s price, usually between 35%-40% will have to be paid off initially, but this means that you can enjoy no interest charges on your monthly instalments.
There are a number of drawbacks however. This financing option isn’t available on all cars, so you may have to spend more time shopping around. You are also less likely to receive any type of discount from the dealership, although it is always worth speaking to your lender to try and get the best deal. As well as this, the loan terms on a 0% finance deal are typically shorter than with other financing options. This means that, despite the fact you are paying no additional charges, your monthly costs may still be higher.
Used cars are often a much more affordable way of owning the vehicle you want. Dealerships also frequently offer their customers warranty, servicing plans and competitor price matches, making it a safe and reliable way to buy. Here are some of the best ways to spread the costs of a used car purchase.
Personal Contract Plan (PCP)
Opting for PCP is a good way of keeping your monthly repayments lower than they typically would be with a third party lender. It is an ideal choice for anyone who wants to keep their monthly outgoings under control.
You will have to pay a deposit on the car and then follow this up with monthly instalments. At the end of your agreement term, you have the option to return the car at no additional cost or trade it in to start a new PCP deal on a different car. Alternatively, you have the option to pay off a big lump sum, or ‘balloon payment’, after which you would own the car.
This large ‘balloon payment’s is one of the reasons your monthly payments are generally lower, so it is a great choice if you enjoy driving a different model every few years or so. However, if you are planning on buying the car, this option usually works out more expensive overall than hire purchase (explained below).
There are also a number of other factors that you have to keep in mind with PCP. Firstly, you must agree to specific mileage limits set out by the dealership. If you exceed these limits then you will have to face charges for any extra miles you have undertaken. This cost is typically around £0.20 per mile. Another issue is that you are required to keep the car in a good condition throughout the agreement period. This means that if there is any damage to the vehicle, you will be required to pay the repair/cleaning costs at the end of your contract.
Hire Purchase - available at Cargiant
Hire Purchase is often the simplest and most flexible way to get finance on the used car of your choice. It is one of the most popular financing options and can end up being very affordable as well. It basically allows you to hire the vehicle until your contract is finished, at which point you will have full ownership of the car.
You will have to pay an initial deposit, which is typically around 10% of the car’s value. You will then pay monthly instalments for a fixed term. This is usually between one to five years, depending on the arrangement with the dealership. There will also most likely be an administration fee added to your first payment and an ‘option to purchase’ fee with your final one as well.
An advantage of hire purchase is that the deals are usually very flexible. You have the option to pay larger sums of money each month and will not be charged for paying the full amount off earlier than agreed. The fixed rate of interest also means that you know exactly how much you will be paying each month and, once paid off, the car will be yours.
With hire purchase though, you do not own the car until your contract has ended. This means that you are not allowed to sell or modify it without the express permission of the lender. You will also need to bear in mind that hire purchase is not available on any vehicle over 10 years old. This means that if you want an older car, you will have a smaller repayment period, e.g. a seven-year-old vehicle will have a maximum repayment term of three years. This means that your monthly repayments could work out to be more expensive.
What should you do if you have a poor credit rating?
With all financing plans, your credit rating is a determining factor in how much interest you are charged and whether or not you are approved for the plan in the first place. A bad credit score can result in you being refused any sort of financing option altogether.
But if your credit is far from perfect, then there’s no need to despair. There are a number of things you can do to improve your rating and increase your chances of being approved for finance.
Manage your credit cards
One of the fastest and easiest ways to build up a good credit rating is by managing a credit card. This is because it shows potential lenders that you can be trusted to make frequent payments against your debt. Opt for a credit rating credit card, that offers you low limits with very high interest rates. Use it frequently for purchases and be sure to always pay off your credit payments in a timely manner.
Similarly, you should cancel any unused credit cards you currently have. This not only shows that you are active in managing your finances, but also reduces your risk of being a victim of fraud if your card or information is stolen.
Help lenders find your history
Lenders will not agree any finance deals unless they can run a full check against your history. One of the best ways you can help them do this is by making sure you are registered to vote. Even if you have no interest in voting, doing this will automatically save your details to an official government system and make it so much easier for lenders to find everything they need to know about you. The process is very straightforward. Simply go to www.AboutMyVote.co.uk and enter your postcode to find your local council. Then just fill in the form and return it.
You should also ensure that your taxes are fully paid (if you are self employed) and that all your official documents are up to date. If you have changed address, you should always alert the DVLA to update your driving license. As well as this being official evidence for lenders, it is also a legal requirements and failure to do so can result in a £1,000 fine.
Be patient and proactive
While improving your credit score, it’s important to be patient. Don’t apply for any more credit deals or financing plans until you have fixed any problems you may have with your credit file. This will mean that, when it comes time to seek out a car financing option, you are more likely to get the best and most affordable deal.
You should also use personal credit tools, such as Experian Credit to keep an eye on your credit score and track any improvements. This will also make it easier to identify and resolve any issues that may arise, such as if you’re incorrectly charged for something or fall victim to credit fraud.
It may also be worth considering a joint finance application with a partner or family member. If the joint applier has a good credit history, then this will help to improve the financing plan you are offered. However, if their credit score is poor, this can have a negative influence on your application, no matter how good yours may be.
Please note, this blog has been archived and is no longer updated.