A Beginners Guide to Car Finance and Loans

Buying a car is an exciting time, and there's nothing quite like that fresh new car smell as you drive it off the dealership. Before you've even got the keys, you'll need to decide how to pay for your new set of wheels. Most people use finance, but you might have a few questions if it's your first time financing a vehicle. That's what this guide is here for, to give you the rundown on all things car finance and loans.

What should I know before I apply for a car loan?

So you've decided to finance your next car purchase? Now it's all about what you need to know before applying, so you can get in place for the application. For starters, it helps to have a good credit score. Generally, the higher your score, the better your chances of being granted financing. Being able to prove your source of income also helps, as any lender will want proof that you can afford the monthly repayments. You'll also need to provide other documentation, such as proof of identity and your address. A passport (or driving licence) should suffice, while recent bank statements or utility bills will be enough to prove your address.

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How should I prepare for a car loan application?

There are a few things you should know in preparation for buying a car if you're one of the six million people who use finance to purchase their vehicle. For starters, it's all about the deposit (or deposit). This is the amount you pay from your own pocket, and it dictates how much you'll need to borrow. You can use a car loan calculator to see how much you might be able to borrow. Also, don't forget to take your time when choosing a vehicle. Make a pros and cons list to see if a car is a good choice and if it's worth financing. Lastly, get finance quotes and don't be afraid to ask questions about the car and financing options. The more clarity you have, the more confident you'll feel about your purchase.

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How do I get finance for a car loan?

There are several ways you can get car financing. These include going straight through the dealership and financing the car through them. Alternatively, you can do it directly with the carmaker at an official dealership. Both of these methods are popular for hire-purchase and personal contract purchase agreements. There's also the option of getting a loan, either with a bank or a specialised lender. Whichever option you choose, make sure that you settle on a deal that works for you, and look out for things like the interest rate to ensure you're not paying too much each month. 

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How do I repay my car finance loan early?

If paying a car loan early is allowed, the real question is, really, "Should you?" Much depends on the type of finance agreement you have, be it PCP, HP, etcetera. With a PCP, you have options such as a voluntary agreement; you can simply hand the vehicle back after a certain period in the contract or once you've paid for a percentage of the car. The other involves you asking for a settlement figure, with the lender letting you know how much you need to pay to clear the finance. It's also a similar process for HP, although you don't have to pay a balloon payment at the end of the term.

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Is car finance the same as a loan?

Financing a car sees you borrow an amount of money, either via a dealer or from a bank. You then repay that sum, usually plus interest, over a period of time. Car finance is similar to a loan in that you have to pay back the amount you've borrowed plus interest. But depending on the type of finance deal, there can also be other fees. Both are similar in that they have interest rates, and you'll need a good credit score to get access to the best rates. However, car finance options such as HP and PCP require you to pay a deposit, while a loan doesn't need one as you're simply borrowing the full amount from the lender.

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Is car finance or a personal loan better for me?

It's easy to think that all borrowing is the same. And while there are similarities between car finance and personal loans, there are also some differences. The one you choose mostly depends on your current financial situation and which set-up suits your needs better. With a loan, you borrow the amount needed from the lender, pay for the car in full and make repayments on the loan amount. Car finance often sees you paying a deposit on the car and then following it up with agreed monthly payments, either until it's fully paid or you sell it. Car finance usually comes straight from the dealership or carmaker, while a personal loan is provided by a specialist lender or the bank. Both of these choices have their own specific interest rates, so be sure to check the terms of the car finance or loan.

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Should I get car finance or a bank loan?

Many banks offer loans for car purchases, and it's not uncommon for drivers to use this method when buying their new vehicle. Unlike car finance, a bank loan offers you the entire amount for the car upfront. You pay for the car and become the full owner while making loan payments to the bank for the agreed period. With car finance, you usually pay a deposit upfront and then pay monthly until you change the car or pay it off in full. There are no restrictions with a loan from the bank. With car finance, however, you may face some restrictions, such as a yearly mileage limit.

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Should I get car finance or a personal loan?

Finance and personal loans are some of the most conventional borrowing options when it comes to getting a car, but which one should you choose? Car finance involves paying a deposit followed by monthly payments, usually with a dealership or with the carmaker directly. A personal loan is an instalment loan where you make monthly payments over a set amount of time and requires you to borrow the money from the bank or a specialist lender. Before deciding which option, you should think about factors like the type of car (people buying new cars tend to use finance, while drivers purchasing second-hand ones might use a personal loan). It's also helpful to have a good credit score before you apply, no matter the loan type.

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What is the longest car loan term available?

The majority of car loans last between two and five years, but it is possible to get a longer one. In some instances, you can borrow and spread the cost over seven years. Doing this reduces your monthly payments but increases the overall amount you pay in the long term. That's because a longer-term loan usually has higher interest rates, making the total cost of the loan more than two, three, four and five-year options. So while you pay less each month, your overall cost is higher because you're essentially paying for longer at a higher rate. Still, long-term loans work for some people, and it largely depends on your own needs. Just make sure you understand the total amount due before committing to a longer loan length. 

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What's the best loan term for second-hand cars?

Car loans can average as high as £400 per month. This tells us that drivers prefer more expensive vehicles, even when they're second-hand. On average, the car loan term is 54 months or four and a half years. The longest possible car loans are ones that stretch over the next 84 months or seven years. Most buyers get loans for between three and five years, as this length usually keeps monthly payments reasonable while also being the average time most people get a loan for. This is especially true if you have a good interest rate. When deciding on the loan length, you need to think about the contract term that you should get before signing the agreement. If you want an affordable monthly repayment amount but also want to finish paying off the loan fast, then consider getting a second-hand car with a loan for between three and five years.

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Does everyone get a loan to buy their car?

While not everyone gets a loan to buy their car, the majority do. If you can afford it, paying for a car outright could make sense. However, you need to factor in certain aspects, such as cars depreciating as soon as they're driven off the dealership. Many people get a loan to fund a car instead, reducing the financial burden by splitting the payments into monthly instalments. More than two million cars are bought with finance in the UK. 

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Reasons you need to stop stressing about car loans

Buying a car is a big responsibility, but it's not a decision that needs to stress you out. Today, car finance applications are simple and straightforward, and you can even get a loan with a bad credit score. On top of that, you can use a car loan calculator to see how much you can afford and get a good idea of the monthly repayments. So don't stress. Take your time and find the right car finance deal for you. 

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Your tick list for searching for a good car loan deal

You can find a great car loan as long as you take the time to research and put all the right preparations in place. Decide whether you want HP, PCP or a loan, then compare interest rates between lenders and use a loan calculator to see your affordability. Check the interest rates, read customer reviews about the lender, read the fine print and choose a lender that makes it easy to get a car loan, preferably one where you can apply online. 

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Do I need comprehensive insurance with a car loan?

The insurance works differently when you get your car through a loan since the vehicle is not yet yours technically. A fully comprehensive car insurance policy is necessary if you are leasing a car, and some companies may include it in your loan package. However, you should check with the lender to see if it's covered. Otherwise, you are responsible for insuring the vehicle. Comprehensive car insurance allows you to claim payment in case of an accident, even if you are the one responsible for it. It also covers the car damage even without knowing or proving who might have caused it.

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Can a parent get a loan to buy their child's car?

While you can't get a loan for your child, you can buy a car with a loan and make the payments. In this scenario, the car would legally be yours, and the finance agreement would be between you and the lender. However, there's nothing to stop you from putting your child on the insurance as a registered driver. This way, they can drive the car, but you would still be the owner and the person responsible for paying the finance off. 

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What if you can't afford car finance repayments?

Your lender will get in touch if you miss a payment to see why you couldn't make it. If it's a one-off, then you get away by paying it late without the lender taking further action. However, continuous failure to make your car finance repayments could lead to you defaulting on the loan. Other than potentially being taken to court, there are further repercussions, including a County Court Judgement (CCJ) and your credit score decreasing. Late payments and defaults can also last on your score for up to six years. This is why it's important to be transparent with the lender and communicate with them. They could enable you to postpone payments for a short time, or they might just be ready to prolong the loan length to minimise the cost of the monthly instalments.

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How can I reduce my car finance debt?

There are several ways to reduce your car finance debt and bring payments down or even clear it altogether. For starters, anyone with a personal contract purchase can have the keys back halfway through the loan. You'll no longer own the car, but they'll be no additional payments on the loan. There's also the option to refinance, extending the term to reduce the monthly payments. Just remember that you may end up paying more in the long term if you go down this route. A last resort is a voluntary termination, although this will show up on your credit report. 

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