One of the milestones of adult life is finally having major purchases under your name and using your hard-earned money. 😃 As an adult, some assets may need financing, such as buying a car. And when you do, it is imperative that you do things right. That’s why it’s helpful to learn as much as you can about car finance before you embark on this exciting journey.
For a first-time buyer, you may find the process of shopping for a car a really thrilling experience. But whilst you should of course enjoy this new venture, you must also be wise and practical about your budget. This is where you can take advantage of car finance. As you make your way to buying that first car, you can choose from various car finance deals from different car finance companies in the UK to help you in reaching that goal.
If you want a new car, but you’re on a limited budget and have no idea what to do to make that purchase, then read on.
Car Finance Explained
Some buyers prefer, or mostly need, to finance a car rather than buying it outright with cash. Since buying a car is a big purchase, car finance makes it more affordable to buyers because they can pay for the car through monthly instalments. Essentially, the car finance company will be the one to pay for the car you want, and then you will pay the lender back every month.
Until you have completed all of the payments, the owner of the vehicle would be the car finance company. But once you’ve paid everything off, then the ownership of the car will be transferred to you. During the time that you’re still paying for it, you can use the car fully. When it’s finally yours, you can choose to keep it, sell it, or trade it in.
Types of Car Finance
There are different types of car finance and car finance options in the UK. You can choose Hire Purchase or Personal Contract Purchase. With these two types of car finance, the payments are spread over a certain period. You have to pay a fixed amount every month.
HP has a slightly higher monthly repayment amount than PCP, but after all the payments are made, the car is yours. PCP is more affordable but you need to make an optional final "balloon" payment if you want to own the car. Otherwise, you can simply return it.
Who Can Get Car Finance in the UK?
To get car finance in the UK, you must be at least aged 18 and a UK resident. Your credit score will also be assessed during your application. Before you get car finance, it’s best to know what a credit score is and understand how it can affect your car loan.
What is a Credit Score?
If the idea of credit score is new to you, it is basically your rating given by different companies (such as Experian, Equifax or TransUnion) based on your financial history. A credit score is essential to your suitability and qualification for some types of car finance deals and how much your monthly dues will be.
A credit score is given in by different companies sometimes in various ways, but the most common is through numerical scoring from 0 to 850, the latter being the highest. The essence of a credit score is it rates your eligibility and how great the risk will be for finance companies who loan you money.
Credit score ratings are divided into five categories - excellent, good, fair, poor, and bad. The highest rating you can get is, of course, excellent. If you belong in this category, it means that you have an impeccable record.
As a beginner, you can not expect that you’ll be given this rating right away, especially if you don’t have a credit history yet. But if you repay your future transactions on time every time, it will help your credit score immensely.
Will I Get Accepted for Car Finance?
Your credit score has a crucial role if you’re applying for car finance. Having an excellent score will increase the chances of your application getting approved. So, to prepare for your car finance application, understand how different credit rating agencies give scores, check what your score is, and look for ways to improve it.
To find out about your credit score, you will have to request a copy of it from any of the three principal credit reference companies. Experian, TransUnion, and Equifax are credit reference agencies with different scoring criteria. And since your score may differ between these agencies, it is preferable to ask for a report from each of them to get an accurate rating.
Improving Your Credit Score
If you have already accessed your credit report and have seen your score, the next important step is improving it. There are numerous ways you can do it. For young professionals, you can start with registering on the electoral roll. Having your name on the list is additional proof of your identification. You can go to gov.uk and find out how you can register to vote by post or online.
Next is to double-check your file for any errors. Even a seemingly minor mistake on your file, like an incomplete or missing address, can significantly affect your score. So, look over your file again and make sure that you didn’t miss any detail. Immediately report if you notice inaccurate information on your file.
When it comes to credit, it is important to remember that it is not only your record that is being scrutinised but those who are linked to you financially. A spouse, family member, or friend you have a joint account with can affect your rating. If a credit rating linked to yours happens to be poor, it can influence your score.
Another easy way to improve your credit score is to stay in one place for a considerable amount of time. If you move address often in a year, lenders might get the impression that there might be some issues.
Car finance for beginners may seem daunting but don’t worry. Prepare as best as you can for your car finance application, and make sure that you go with a finance provider that is clear, transparent and always ready to help you understand every part of the borrowing process. 👍🚘