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What Are The Rules For Car Finance?

Thinking about help to buy your dream car? Exciting times! Applying for car finance is the first step in getting that great car you've seen,  and now desperately want. Most people can't afford to pay for a new vehicle outright with cash and therefore opt for financing. Like all borrowing, these plans come with rules and regulations that buyers need to adhere to.

Car finance is a contractual agreement. Because of this, both parties have obligations to fulfil within the loan term period. Car finance rules differ depending on the financing option you choose.

Before signing the finance agreement for a vehicle, it's always best to take time to understand all the little details in the fine print. Do take time to fully understand this and if you're not sure then ask questions. Here's a breakdown of some of these rules for each auto financing plan.

Personal Loan

Provided by banks and credit unions, personal loans directly provide cash to the borrower to purchase the car. And you won't need to put down a deposit if you don't want to. Let's take a closer look at the rules and regulations.

Interest Rates

Once your loan is processed, the finance agreement states the interest rate for the loan. This cost is charged on top of your monthly payments to the bank. The rate is determined based on your loan amount and credit rating and will usually remain the same.

Monthly Payments

Car finance rules governing personal loans require the borrower to repay in monthly payments. These are made up of an amount to repay the principal sum borrowed and the interest. Depending on the bank, the rate can be fixed or variable.

Loan Term

Banks spread out personal loans for up to 7 years. A strong credit score allows for longer loan terms but when buying a car that depreciates in value it's not wise to borrow over too long a period.

Car Ownership

Once you get a personal loan, you own the car even when still making monthly repayments.

Can You End A Personal Loan Agreement Early? 

When signing the car finance agreement, there are set term limits. If you decide to get out of the contract early, you will incur penalties. The lender will ask you to pay a settlement figure for breaking off the contract early.

According to the Consumer Credit Act UK, lenders can ask for two months interest as the settlement figure. Once you agree, you have 28 days to settle the loan.

Dealership Financing

If your credit rating is poor or you don't qualify for a personal bank loan, you can use the dealership. Like with independent financing, the borrower gets a loan amount to be paid back over several months.

The car finance rules and regulations for this financing plan are slightly different. And there are two options here, either Hire Purchase or HP, or Personal Contract Plan (PCP). Dealers also offer a leasing arrangement, effectively you hire the car over a longer period, then return it to the dealer at the end.

Loan Term

Once you get on a dealership financing agreement, loan contracts range from 2-5 years. As a car buyer, you need to pay off your car loan within this period to avoid attracting any penalties.

Deposit

With a personal contract purchase (PCP), hire purchase (HP), or leasing contract, you have to make an initial down payment at the beginning of the contract period. For most dealers, the deposit should be a  minimum of 10% of the total car cost.

The larger your deposit, the less money you will need to repay over the duration of your finance agreement. Therefore, if you want to make lower monthly payments, this is the best option.

Monthly Payments

Just like with a personal loan, you have to make fixed monthly payments as stated in the car finance agreement. The size of the payments depends on your initial deposit, interest rate and loan term. For more extended term finance agreements, the monthly instalments will tend to be lower.

Interest Rates

Car finance rules state the interest rate to be charged on a loan. Different lenders offer different rates according to the buyer's credit history and loan amount. The cost of interest is included in your fixed monthly payments.

If you choose to take car finance for a more extended period, the cumulative interest will be high over time. For borrowers with a low credit score, the interest rates will tend to be higher too.

Car Ownership

With dealership financing, the vehicle belongs to the lender until the loan is paid off. According to the set regulations, you can't alter or sell the car until you make all the payments. The finance agreements also indicate any penalties to be incurred if you change the vehicle.

Collateral 

Because the car doesn't belong to you, it acts as security for the loan. Once you default or make any late payments, the dealer will repossess the vehicle. An advantage of this is that you will not lose any other assets.

Mileage And Repair Costs

The leasing and PCP finance agreements set mileage limits for the car. When returning the vehicle, you should not have exceeded these terms and conditions. If you go above them, the dealer will charge you a penalty for the same. Check out the limits and charges before you sign the contract. 

Other Terms And Conditions

With dealership financing via PCP car finance, rules and regulations are different to an HP. At the end of the contractual period, buyers have three options. They can either pay off a final "balloon" payment for full vehicle ownership, trade it in for a new one,  or return the car to the dealer.

Can You End A Dealership Agreement Early?

Same as for a personal loan, finance agreements with a dealership or car finance company expect you to pay off the loan over the full duration of the set contract term. They charge interest on top of the loan to make some cash. Once you decide to make an early payment, the dealership loses the chance to make money by receiving further interest.

You will incur an early settlement figure to cover the costs. Lenders should indicate this penalty on your agreement. If it's not, it's best to confirm with your lender before signing the contract.

Work With Us

The good news is that things are getting easier. Car finance in the UK is readily available for buyers who need to buy a vehicle, and you have several options. However, all these agreements are governed by car finance rules that hold both the buyer and lender accountable. Before signing any finance agreement, it's advisable to understand the terms and conditions to avoid incurring penalties.

If you are looking to get on a car financing plan, and you are looking for something straightforward and innovative,  Carmoola is your best option. All you have to do is download and apply to spread the cost of your car over a period of time.

Just a few questions, a nice selfie to ID you and then you're away - you'll have your decision in just a few seconds. With Carmoola, your application is fully automated without the need for interviews, phone calls or paper documents. Simple!

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