Well hello there 👋 great to see you! If you're looking for how to get the best finance deal on your car, then that's awesome because that means you're getting organised in advance of buying it. With things like car finance, it's important to be in-the-know, so you can make sure you're getting a deal you're happy with and don't fall victim to the last-minute sales pitch at a dealership. So let's break it down and make sure you've got all the facts and information you need.
What is car finance?
In order to know exactly what you're signing up for, let's look at what car finance is. Car finance is essentially a loan agreement, where you are able to pay for your car in monthly instalments, instead of in cash upfront.
The exact length of the finance agreement and the monthly repayments will vary from one type of finance to the next, so it's important to decide whether you want to eventually own the car outright, or whether you're happy to just lease it for a period of time.
Usually, finance agreements will be around 2-5 years. The longer the agreement, the lower the monthly payments. The better your credit score, the lower the interest rate (and monthly payments).
What are the different types of car finance?
There are a couple of common types of car finance you'll come across. We've broken it down here into 3 types.
Hire Purchase (HP)
Hire Purchase is the easiest one to understand. You usually pay a small deposit towards the car, and then take out a loan for the rest, which you repay in monthly instalments over a set period of time. Some things to remember with an HP agreement:
- The loan is secured against the car, so if you miss lots of payments then the lender is within their rights to take the car away
- Once you've paid a third of the loan back, the lender would need a court order before they could take the car away
- For some agreements, once you've paid for 50% of the car you can return the car if you don't want it anymore and you won't have to make any more payments
Personal Contract Purchase (PCP)
With PCP, there are some similarities. You'll often pay a deposit when you first get the car, you'll have set monthly repayments over a fixed term, but this time there will be a decision to make at the end of the term. You'll have two choices:
- Return the car without any further payments
- Pay the balloon payment, and keep the car
The balloon payment amount is set at the beginning when you first take out the loan, and it represents the amount the car is likely to be worth at the time the agreement ends. Some points to look out for in a PCP agreement:
- There will often be a mileage limit, i.e if you drive more than 6,000 miles per year then you may be penalised later with fees
- You may also be charged for excessive wear and tear, or damage to the car
- There may be limits as to how many days per year you can drive your car abroad
Check out our guide with more detailed information about HP vs PCP loans
Personal Contract Hire (PCH)
These agreements are a form of leasing plan, where you never own the car. So if you're not planning to buy the car at the end (like you can with a PCP) then a PCH may actually be a cheaper option.
With a PCH, you may be required to pay a few months upfront at the beginning of the agreement. You'll have no other bits to pay for, so it's really only fuel to consider.
You may have mileage restrictions, so don't forget to check that in the terms of the contract, and also make sure to keep the car in good condition so you don't incur additional charges at the end. At the end of the term, you simply hand the car back... easy!
What are the costs of car finance?
This is a tricky one because there are several moving parts here! The main things that will impact the cost of your finance are:
- Your credit rating or risk profile (the riskier your profile is, the higher the interest rate is likely to be)
- The interest rate for the loan
- The total term of the contract (usually between 2 and 5 years)
- The total amount you want to borrow
- The deposit you pay upfront (if any)
What can I do to get a better deal on my car finance?
There are a couple of things you can consider when trying to get the best deal on your car finance. Aside from borrowing a lower am
Borrow a Lower Amount
If you've been super responsible with your finances, then there is something you can do to reduce the cost of your finance... sounds obvious but you could contribute a small deposit, and borrow less money!
Lots of lenders nowadays offer zero deposit loans, which can be tempting, but it does mean you're borrowing the entire cost of the car, and that could result in larger monthly payments
Spread The Cost Over a Longer Period
Another factor you can consider is the length of your loan. The longer the loan, the lower the repayments will be each month. However, taking a loan for longer means you'll end up paying a larger amount back overall, as the interest payments are continuing for a longer time.
Get a Better Interest Rate
To do this, you'll need to get organised up front and work on improving your credit score. Let's look at this point in more detail, because aside from trying to negotiate on your car finance interest rate... you'll need to consider a few things to improve the rate you're offered significantly.
How do I improve my credit rating?
To improve your credit rating, you need to demonstrate that you are financially responsible, and reliable at paying the money you owe.
Find out your credit score
The first step to solving any tricky bits on your credit rating is to find out what it is! There are loads of tools out there, but we quite like Credit Karma because they give you handy tips and insights on what's really going on behind that credit score. And it's free - Woop Woop!
Make your payments on time
Now, this is not just applicable for loan repayments. You might not have any other loans! But things like your gas bills, electricity bills, council tax, broadband payments, phone bills... you name it - you need to pay it on time and in full. One great tip for this is to get a direct debit set up, and get it set for the date after you usually get paid each month. Get paid. Pay bills. Sorted!
Get a credit card and use it responsibly
Sounds scary right? Wrong! Without ever taking any credit, how will a lender know what you'll be like with credit? They won't. Take out a credit card with a small limit, and use it to pay for essentials each week. Then pay it off straight away. This shows that you're super responsible and good at paying back credit - yay 🙌
Get into a good savings habit
Some more sophisticated lenders are starting to use Open Banking to assess your affordability and financial behaviour. Open banking essentially allows lenders to see (with your permission) a read-only transaction history from your bank account for the past 12 months.
This helps them to understand your actual income (great news for self-employed people!!) and your normal expenditure. They can also see if you're putting money away into a savings account each month, and if you are, this is a big green tick for a financially responsible person.
What are the benefits of car finance?
There are lots of different reasons why people decide to use car finance. Here are a few examples of reasons we hear a lot from our customers.
"I can invest my capital in other things"
You may have some great savings, but they won't make you any money if you spend it all on a car! Some of our customers prefer to invest and grow their savings, as they can make more money overall by doing this. Then, they use the money they've made to pay off their car loan! So at the end of the loan, they're left with a car that they own, and also the savings they've invested wisely.
"I can get a better car by borrowing some additional money"
So, you've got £8,000 in the bank, and yeah you could buy an old-ish car outright... but is that the right decision? Older cars can have more problems and cost you repairs. They might be less fuel-efficient or have higher insurance premiums or tax bands. You'll also lose money over time as the car depreciates in value, and so next time you may only have £4,000 cash to spend, and an even older car that could take some time to sell. An alternative might be to put some of your capital towards a new car but top it up with finance. Get a better, newer car, maybe even still in warranty, and limit the risk of costly repairs!
"I don't have much money saved, so can spread the cost"
If you're in a situation where you have very little saved in your rainy-day fund, then finance can be a great option for you. Spreading the cost of the car into manageable monthly payments, where you essentially own more and more of the car over time can be a great option!
What are the risks of getting car finance?
As with any commitment, it's important you think realistically about whether it's right for you, and with something like a loan, make sure you are confident you can commit to the repayments throughout the term.
For any loan that's secured against an asset, such as your car, there is a risk that if you get behind with your payments, the car could be taken away. Also, late payments or non-payment can affect your credit file, and so could limit your chances of getting another loan in the future.
Credit files will be relevant for any type of credit such as a credit card, mobile phone contract, mortgages or other personal loans - so it's worth keeping your payments up to date to prevent you from being turned down in the future.
If your circumstances do change through your loan term and you can't keep up with your repayments, then you should always try to contact your lender as soon as possible. They may be able to adjust your loan or put you on a payment plan in order to help with your situation.
However, with Carmoola, adjusting your loan is super easy! At any time you can just jump into the app, and make changes to your repayment schedule.
How do I know if it's a good deal?
With finance, it's difficult to compare your deal against a deal your friend or family member may have. For one main reason: their credit score will be different to yours!
Also, different lenders have different ways of assessing your risk profile, so for example, a more traditional lender may put a lot of emphasis on your credit score to determine what rate you can get, whereas, with Carmoola, we look at other aspects of your income and financial situation in order to try to get you the best rate possible.
One thing to bear in mind when comparing deals is that if you apply with lots of different lenders, they may run a full credit check. A full credit check can leave a mark on your credit file, and lots of credit checks at one time can reduce your credit score and be seen as a negative.
So multiple applications all at once may in fact mean that you get a worse deal. Check with the lender before they run a full credit assessment on you, so you know how many are being done.
When should I organise car finance?
Many car buyers wait until the very last minute to organise their car finance and to be brutally honest, we think this is a mistake. Often, dealerships will offer you finance at the last minute, and it can feel like the easy option to just accept it.
But you might not be getting the best rate at all! You're also likely to be offered other add-ons such as Extended Warranties and GAP Insurance by the dealership. If you're not sure exactly what these things are, or how much you should be paying for them, click on the links to find out more 👍 (both articles have got short videos you can watch too!)
We'd highly recommend organising your finance in advance with a finance provider such as Carmoola. This means when you're ready to buy your car - whether that's online or at a physical location - you're in a great negotiating position to get the best deal. You're buying like a cash buyer, and you've got the power to take the car home today if you want to!
We hope these tips have armed you with enough knowledge to make sure you get yourself the best deal. If they have, then perhaps we can help your friends too? If you know someone else who'd benefit from reading this article, then give it a share and spread the Carmoola love 😍