*Representative Example £3,000 over 3 years, representative 48.9% APR fixed. Monthly payment £145.17. The interest is 10% per annum fixed and service fee is 30.48% per annum fixed. Interest payable £549.95 and service fee payable £1,676.17. Total repayable £5,226.12
When it comes to buying a new car (or at least one which is new to you), being able to hand the money over upfront is not always possible. However, waiting to save up for a new car is not always feasible either. You may need a vehicle to get to work, or to be able to take your kids to school. You may live in a more remote area, or in a part of the country where the public transport links aren’t very good.
When you need a car quickly but don’t have the cash to pay for one upfront, then it’s likely you’ll be looking for a car loan to front the cost.
However, it’s not as easy as simply applying for a ‘car loan’, buying your dream wheels and heading out into the open road. There are a wide variety of options out there when it comes to funding a new vehicle, and this article will help you to understand the difference between them as well as find out the best option for you.
There are a number of ways to obtain finance in order to pay for a vehicle. Here are the main alernative car loans:
With Hire Purchase (HP), you pay a deposit upfront, which may be a small percentage of the cost of the car. You may also be able to use your old car in part exchange in place of a deposit. After this, you pay monthly payments and at the end of the agreement the car is yours. However, if you fail to make a payment, the car can be taken from you and you won’t be able to sell it while you still have payments outstanding.
Personal Contract Hire (PCH) and Personal Contract Purchase (PCP) are two ways of making small payments on a car without having to front a lot of extra cash. With PCH, you pay monthly instalments you get an upgraded car every few years but you will never own your vehicle. Think of it as a long term hire car. With PCP you make low monthly payments and then are given the opportunity to pay the difference at the end of the agreement in order to own the car, or upgrade and continue paying monthly instalments.
Taking a personal loan such as a guarantor loan is a good way of raising all the cash upfront so that you’ll own the car outright from the very beginning. You’ll have no restrictions on mileage (as with PCH and PCP) and you’ll be able to sell it whenever you want to. You simply borrow the full amount at the beginning and pay it back over a number of months with manageable instalments. You’ll need a guarantor (a friend or family member) to sign up and agree to pay if you don’t. To find out more, visit this handy FAQ page at Guarantor My Loan.
The amount you can borrow is dependent on two things: the amount a lender is willing to give you based on your credit score and current incomings and outgoings, and the amount that you are comfortable enough to borrow and pay back for the car that you want. If borrowing money to buy a vehicle would mean putting yourself in financial jeopardy, then the loan is not worth it and should be avoided. Due to the relatively new FCA (Financial Conduct Authority)’s Treating Customers Fairly guidelines, lenders must be confident that the borrower can pay back the loan comfortably in their current situation. They’ll check that you’re not paying over the odds, but as there are a number of rogue lenders out there and because only you can really gauge how much you’re really willing to spare each month towards the cost of the car, it’s always best to go through your finances and understand them inside out before accepting any offers for credit.
It may be useful beforehand to check on your credit rating, which can be found in a number of places online. Experian, CallCredit and Equifax are the three main credit reference agencies used by lenders and other businesses in the UK. Your credit file can be found by entering your details into one of these websites, where it will show you all current debts, past credit agreements up to 6 years and your personal details. It may also tell you how much you would be able to borrow. This is called a credit limit. You do have to pay to see your file, but as it will give you an indication of whether you have a ‘poor’, ‘fair’, ‘good’ or ‘very good’ profile, many people deem it to be worth it. This is because if you apply to a few lenders and get turned down, this may leave a trace on your file which looks negative. If you want to view your credit file without having to pay, CallCredit have a service called Noddle, which will give you free access to your file. Be warned, however, that it covers the cost of this by advertising credit options, which may or may not be the best fit for you, so always do your research before signing anything.
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When choosing the right car for you, consider what you’ll be using it most for. Will you need to ferry around a lot of people? Will you be driving on motorways a lot or just around country lanes? Do you need a lot of boot space? Try to visualise yourself using it in day to day life and build up your wish list of things you need from there. It’s easy to get drawn in by more exciting vehicles and models which perhaps aren’t very practical when you have a good car salesperson on your hands, so make sure you know what you want and stick to it and you can’t go far wrong.
If you’re getting a personal loan – either a straight up instalment loan or a guarantor loan with the help of a friend or family member – then you are free to buy whatever car you want… as long as it’s within budget, of course. If you want to buy from a private seller then this is perfectly possible, whereas Hire Purchase, PCP or PCH will restrict you to dealerships where you may not always be getting the best price in the first place
If you’re opting for HP or Personal Contract agreements, then you may not get a lot of choice when it comes to the car you want. Car dealerships will often offer these agreements on cars that they already have out on the forecourt, so it’s up to you to find the vehicle you want and then see if they will agree to lend to you.
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