Is Car Finance the Right Option for Me?
Maybe you’ve already spotted your dream car 😃 but as soon as you see how much it’s going to cost you to buy it, you become disheartened. 😧 Buying the car with cash would probably eat up a big chunk of your savings and that’s just not the way to go. It’s a good thing that there are car finance deals that allow car buyers to spread out the cost of the car, making it more affordable through fixed monthly payments. But is car finance the right option for you? Here are some things to consider first!
Do You Want to Own the Car?
This is the first question you need to ask yourself because this will determine the type of car finance agreement you’ll choose. If you only need a car for a couple of years, then you may want to think about getting a Personal Contract Hire, which is a type of car finance where you can rent a car long-term.
But if you have decided that you want to keep the car, then you can get a Hire Purchase deal where you’ll make monthly payments for a certain number of years and when you’ve finished making all payments, the car will be yours. In case you’re not sure yet and want a more flexible option, then you can get a Personal Contract Purchase car finance deal where you’ll have the choice to buy the car or return it to the car finance company.
What is Your Credit Score?
Your credit score is crucial in getting car finance. The lender will check your score because it represents your credit history and how well you’ve been paying your previous debts and loans.
A high credit score means you’ve been punctual in making payments on your bills, credit cards, and other financial obligations. On the other hand, a low credit score doesn’t necessarily mean that you’re bad at handling finances. It’s possible that you don’t have enough credit history yet, which is typical for younger car finance applicants.
Before you apply for car finance, make it a point to check your own credit score first. This will give you an idea of whether you’ll have a good chance of getting approval from the lender or if you need time to work on your score and improve it.
Remember that applying for car finance means the lender will conduct a hard credit search on your credit report. Hard credit searches leave a record on your report and may knock off a few points off of your credit score. If your score is not good, then applying for car finance will only drag it lower.
Can You Afford the Monthly Payments?
If you’ve already checked your credit score and you’re confident that you’ll be extended credit, the next question to ask is whether you can afford the monthly payments. This is a question that you need to answer honestly because you wouldn’t want to end up missing payments or defaulting on your loan where the lender has to repossess the vehicle.
Firstly, how much can you pay for the deposit? While there are zero deposit car finance deals, it’s better to pay a deposit so that you’ll borrow less money, have lower monthly payments, and pay less interest. A bigger deposit can do a lot in making the monthly repayment amount more affordable.
Second, you need to take into account the cost of running and maintaining the car. It’s vital to have a budget for fuel, maintenance, and repair costs. Also, don’t forget that you also have to set aside money for insurance, taxes, and congestion charges. Consider all these expenses first so you can make a good estimate of how much money you’d need to set aside for the car.
Do You Really Need a Brand New Car?
A brand new car is, of course, more expensive than a secondhand vehicle. Sure, a brand new car has its own set of benefits but maybe you can consider getting a used car and save up your money for other car-related expenses instead.
Used cars are great because they’ve already depreciated so you’ll get more value for your money. With a brand new car, it will lose 10% to 20% of its value within the first year. As soon as you drive away from the dealership, you’ve already lost money because the car has already begun depreciating.
There are many secondhand vehicles that are actually nearly new like ex-demonstrator cars. You can still get the convenience and enjoyment of having your own car without paying more.
If you’re asking “Is car finance the right option for me?” try asking the questions we’ve raised here so you can determine what type of car finance to get, whether your credit score is good, if you can afford the monthly payments and other car-related expenses, and whether you’re alright with buying a used car instead of a brand new vehicle.
The more you know and understand your needs, spending habits, and finances as a whole, the more you’ll be able to know the right choice for you. Take your time when making a decision because a car finance deal can last for at least three years so that’s a big financial responsibility that you have to be committed to.