How Do I Get Finance For A Car Loan?
So you've finally found your dream car - amazing! 😃 Maybe now you will be thinking about how to get a loan to finance your transaction. 🤔 Purchasing a new car requires critical financial decisions. Most buyers in the UK have to seek out finance to fund this expensive purchase. These lending arrangements cover borrowers who don't have enough cash to pay for the vehicle in one lump sum payment.
A car loan allows you to spread out the payments out over several months. Because of this, most buyers will opt for this arrangement to ease the financial burden. Car loans usually come with a fixed interest rate that means your payment will not change during the term of the loan. When looking for options, there are a few, you can finance a car loan through the bank, or car finance company, or via a dealership.
How do you go about deciding on what is best and how to get this car loan? Here's a breakdown of the different options.
Getting a car loan via a dealership is the most popular method of financing in the UK. But vehicle buyers also have different options available at the dealer depending on their financial situation and needs. Dealers offer plans such as hire purchase (HP), personal contract purchase (PCP), or leasing.
What Is In A Dealership Financing Plan?
When applying to get finance for a car loan, you need to have a complete understanding of the vital requirements that make up the contract. This type of financing is can be suited for borrowers who have a poor credit rating.
With the dealership, there is an allowance for varying plans. You can choose to use the hire purchase option, which allows you to make an initial deposit of around 10% and then make subsequent monthly payments over a set period of 2 to 5 years.
A PCP deal states that buyers borrow a specific loan amount that needs again to be paid over several years. Monthly payments are lower because you are only covering the cost of the depreciation, or how much value the car loses over time.
Then, at the end of the contractual period, you can pay a large or " balloon payment" and so you then own the car. You can also opt to trade in the car for another one or return it to the dealer if you don't want to keep the car or make the payment.
The leasing contracts work like renting. The buyer pays monthly instalments for the use of the car and returns the car after the contract expires. This option often includes other expenses like insurance, servicing and road tax, so can be quite a high monthly rate. But excellent if you can afford it and also like to always have a new car to drive and keep up with the latest models.
Every dealership has its own set of terms and conditions. These terms include the car finance interest rates. When applying for a car loan, you will get the annual percentage rate (APR) and representative rate. You can look at this in more detail using a finance calculator.
These rates are calculated based on the initial deposit, credit score, loan amount, and loan contract term. Because these will vary from lender to lender, it's best to shop around for the best deal, as the amount contributes to your monthly payments. Do this before you make a final commitment.
Loan Contract Term
If you need to finance your car loan from a dealer, the loan terms can go up to 5 years or more. Most of the plans range between 2 to 5 years and can be more in some situations. A longer loan term translates to lower monthly payments but higher interest overall.
Mileage and Repair Charges
With PCP and leasing options, dealers will charge you for exceeding agreed mileage limits and any repair costs if the car is returned with damage. The contract indicates the limits, remember, you don't own the car until you've made the balloon payment at the end. If you go over these limits, you will incur penalties that can be costly. Check out the extent of these before you sign.
Financing a car through a dealership doesn't limit you to one particular car. When leasing, you can select a car of your choice and return it at the end and pay for another one. With PCP, you can also choose to trade in the older car for a new one.
No Extra Collateral
Car finance plans don't require added collateral. The car is your security for the loan. Once you default payments, they can reclaim only the vehicle, so be careful not to default.
The dealership sets a figure for your monthly payments. These are dictated by a combination of the amount you need to borrow, the term over which you repay and the interest rate they charge you. This can also be affected by your credit score. Of course, the larger your initial deposit, or the longer the term, the less your subsequent monthly payments will be.
If your credit score is really good, you can finance a car loan via any bank in the UK. You can also approach your credit union for a personal loan. Let's take a look at what makes up a bank agreement.
Personal loans are unsecured, making it easy to access cash. As long as your credit history is good, you can get a loan that does not put your car on the line. However, you might have to accept a slightly higher interest rate. Again do shop around. You still need to keep up with monthly payments, of course, so you don't negatively affect your credit score.
A car loan agreement will include an interest rate that you need to pay together with your monthly instalments. For instance, the HSBC bank in the UK charges a 3.3% representative APR.
However, this rate might vary depending on the size of your loan and other factors You can use financial calculators for a car loan to gauge your expected monthly loan payments.
Personal loans from the bank tend to have more extended contract periods. You can get up to 7 years to pay off the loan. This plan is flexible for people who would like to make lower monthly payments. However, it may be expensive in the long run due to the accrued interest charges.
Most buyers choose to finance a car loan because of the spread-out payments. The ability to make monthly payments over time makes car finance more affordable than paying cash outright.
The bank or credit union will indicate the set monthly payments, which can be fixed or variable. Due to lack of collateral, these costs may be higher than with dealership financing.
Financing a car loan is a very straightforward process whether you use a dealership, car finance company or a bank. Both financing options have specific terms and conditions that regulate the process. If you can't afford to pay for a vehicle using your cash savings, car finance presents an opportunity to spread out the payments using a loan.
Application is within our app and takes no time at all. Once approved you will receive a virtual card fully charged with your borrow amount, ready to shop and negotiate with any dealer.
It's just like using a credit card to spread the cost of your purchase, but without the high interest rates. In addition, you can opt to vary your monthly repayments with just a couple of clicks within the app. Happy car shopping! 👍😀