The popularity of car finance is on the rise. With over 91% of cars bought in 2019 on some sort of finance or loan, is car finance right for you?
How can car finance benefit you? Let’s take a look at the ins and outs of car finance deals and help you decide whether you should join the finance revolution.
Will you be approved?
Car finance is great but not everyone will be able to get finance and it is never guaranteed. However, there are many finance lenders now who can offer finance to a range of people with different circumstances. If you have applied for bad credit car finance in the past and have been declined, then you may think that getting a car on finance with bad credit is impossible. The first thing you should do is check your credit file before you start applying. Your credit file pays a big part in your ability to get approved, as it shows lenders what type of borrower you are. If you’ve had trouble making payments in the past, then you may find it more difficult to get approved for finance
What are the different types of car finance?
In the UK, there are 3 main types of car finance that are the most popular. They include Hire Purchase (HP), Personal Contract Purchase (PCP) and personal loans. Each are similar in principle; they all include borrowing a certain amount of money to be used to fund a vehicle and pay it back each month with interest.
Hire Purchase (HP)
This type of agreement is when you hire the vehicle from a finance lender until you’ve made all the repayments. The ownership of the vehicle is then automatically transferred over to the driver and the end of the agreement. This is one of the most popular car finance options in the UK. You can choose to put down a deposit but there are many no deposit car finance options available. The main benefits of Hire purchase finance include no mileage restrictions, fixed payments over the entire term and no large lump sum at the end of the agreement.
Personal Contract Purchase (PCP)
Personal Contract Purchase is similar to hire purchase in the sense that you pay for a car monthly to a fixed term. However, at the end of a PCP agreement, you have 3 options. You can either hand the car back, use the resale value towards a new car or pay the ‘balloon payment’ and obtain ownership of the car. Main benefits of PCP agreements include, lower monthly payments, fixed costs and the flexibility to change the car at the end of the agreement.
A personal loan can be used for pretty much anything, meaning that it isn’t fixed to the car. This means you can sell the car at any point without needing permission from the car finance company. As soon as you pay for the car, you will automatically become the legal owner of the car from the off. Main benefits of a personal loan include fixed payments each month, buy from a dealer or private seller and the vehicle cannot be repossessed.
Is your credit score good enough?
As mentioned, credit scores play a big part in getting approved for finance. If you’re worried about getting accepted for finance or you’ve already been refused car finance then you may consider improving your credit score before you start applying again. There are a few ways in which you can easily improve your credit score:
Being on the UK electoral roll can help to increase your credit score. It also allows lenders to quickly check that you are who you say you are and verify where you live.
When you use hard search applications that perform a credit check, it is recorded on your credit file. Multiple hard search application in a short space of time can indicate to potential lenders that you are desperate for credit and can negatively affect your credit score.
One of the biggest factors of your credit score is your ability to make payments on time. Lenders want to know that you can be trusted to make their repayments on time and in full. Having many missed payments on your credit file can lower your chances of getting approved. Even a few months’ worth of evidence that you can be trusted to pay back a loan or credit can help to increase your credit score.
There can be misinformation on your credit file that is holding you back. When you check your credit file you should look out for any fraudulent applications and make sure all your information is up to date. Even an incorrect address can harm your score.
When you take our finance or credit with another person using a joint application, you become financially linked on your credit file. Many people consider a join application to strength their application e.g. when one person has bad credit. If you no longer have any active credit with a financial partner, its best to disassociate yourself from them. This is because their low credit score could be harming yours too.