Overview
Cars are an expensive purchase and not many can save up enough to cover the entire cost, that’s where car finance comes in. Car finance is a general term that covers different ways to borrow money to pay for a vehicle. It’s a type of loan that allows you to spread the cost of the car over several months, or more usually, years.
Benefits of Car Finance
There are a lot of benefits to buying your vehicle with car finance. Here are the main ones:
● Full awareness of what you’re paying: With car finance, your payments will be fixed under a car finance agreement that lasts for the agreed term. You will know exactly how much, when and for how long you’ll be paying.
● You don’t need to have a perfect credit score: While lots of brokers prefer a great credit score, it is often not necessary. Brokers often work with customers with bad credit scores and help them find a deal that works great for them.
● Build your credit score: If your credit score isn’t the best, buying a car on finance can be a great way to improve your credit rating. This is true as long as you keep up with your monthly payments, proving to future lenders that you are capable of repaying your loan.
● Part exchange your car: With many finance agreements, you can part exchange your current car, meaning you don’t have to worry about the hassle of having to sell it.
● More security: Buying your car with car finance can provide additional security, as you can add maintenance to your finance agreement. This means you don’t have to worry about MOTs, tyres and servicing.
Types of Car Finance
There are a few different types of car finance but the most common are the following three:
● Hire Purchase (HP): Hire Purchase is a type of car finance that allows you to buy a car and pay in monthly instalments over several months or years. It usually requires a deposit of around 10% of the car’s worth, however, this isn’t always necessary. Once you pay your last payment on the car, you become its legal owner and get to keep it. In essence, you are renting/hiring the car until you pay off the instalments. Ideal for those who want full ownership of their vehicle.
● Personal Contract Purchase (PCP): PCP is the type of loan that allows you to buy a car without paying the full cost upfront. It has lower monthly payments than hire purchase car finance so it’s considered a more affordable option, especially if you change new cars regularly. You will need to pay a deposit and make monthly payments until your fixed term is over. Then you have three options: hand back the car, trade it in and start a new PCP agreement, or keep the car by making a balloon payment. This type of loan is favoured by those who enjoy driving a new car every few years and want lower monthly payments.
● Leasing: Leasing also known as personal or business contract hire is a long-term rental, no ownership lease. It usually lasts between 24 to 48 months and at the end of the contract, you simply return the vehicle. This is a great option for drivers who prefer to drive the latest models with minimal long-term commitments.
Things to consider before taking car finance
● The length of the contract: Car finance loans can last anything from several months to several years.
● Car finance’s effect on your credit score: Car finance can have both a positive and negative impact on your credit score. A good repayment history can improve your credit score, while late or missed payments will worsen it.
● Planning and budgeting: Before signing a car finance deal, it is important to plan and budget to ensure you can meet your monthly payments. You should avoid borrowing more than you can comfortably repay and try to keep the monthly payments as a manageable portion of your income to prevent financial strain.
● Interest payments and fees: You should research fees and interest rates carefully, as a longer-term loan may sometimes result in lower monthly payments but a higher overall cost.
● Read the fine print carefully: Carefully reading all terms and conditions before signing anything is essential, especially in the car finance industry. Pay close attention to interest rates, fees, penalties, and any additional terms that may impact your financial situation.
What you need to apply for car finance
When applying for car finance there are quite a few things you need. You’ll need:
● Proof of address, such as a council tax bill, utility bill, or bank statement.
● A valid form of ID, such as a passport or a driving licence
● Proof of income, Some lenders will request proof of income, usually a few months’ worth of payslips.
Ready to finance your next car?
Looking for flexible options with transparent pricing and competitive rates? Whether you’re looking for Hire Purchase, PCP, or leasing, Enjoy Finance can help you find the best deal for your budget.