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 will 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.
What Kind of Car Loan Is Best For Me?
There are a number of ways to obtain finance in order to pay for a vehicle. Here are the main alternative car loan options:
- Hire Purchase
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.
- Leasing Agreements
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.
- Personal Loans such as Guarantor Loans
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.
How Much Can I Borrow With A Car 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 Financial Conduct Authority (FCA) responsible lending rules, lenders must be confident that the borrower can pay back the loan comfortably in their current situation. They’ll check that the loan is affordable for you, 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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