If you’re a driver, you’ll have no doubt had a car finance agreement or know someone who has. Car finance or car leasing are the most popular ways to get a car, mainly due to the fact cars are expensive to buy outright.
However, there is often a lot of negative talk around car finance and many people assume it’s bad for your wallet and your credit score. Not sticking to the rules of your credit agreement and failing to repay your loan can have a serious negative effect on your financial life.
First, we’ll look at what to watch out for with car finance and then give you some tips on how to get the best car finance deal!
What to watch out for:
There’s nothing wrong with getting a car on finance, you only need to know if it’s right for your situation and a few easy tips to avoid a bad car finance deal.
High interest rates.
Firstly, you can get a car finance deal with 0 interest to pay but these deals are usually only offered on brand new cars which have a high monthly payment any way. You’ll no doubt have to pay interest on the finance deal you get but it’s important you choose the deal with the lowest APR rate available.
There are different factors which affect your interest rate such as credit score, loan amount, type of finance and the lender you choose but trying to find the lowest APR can be the key to getting a good deal.
Additional charges.
When you take up your proposed car finance deal, it’s important you read your car finance contracts and terms and conditions carefully. There can be many additional costs associated with car finance so it’s important you are aware of them.
Car deals like PCP have annual mileage limits and damage charges you’ll need to adhere too. There can also be charges for missed or late repayments and continuous missed payments can see the car being taken away from you.
Payment schedule.
Some car finance deals may come with monthly payments which aren’t fixed. This means over the duration of your loan; your monthly amount may change. Make sure you choose a fixed payment deal to ensure you pay the same throughout the agreement. This helps to manage your money better and there’s no nasty surprises.
Deposit contribution.
You’ll often see 0 deposit car finance deals being advertised, which are great if you need a car in a hurry. However, it just means you’ll pay the full amount over the course of your loan. The benefit of having a deposit to put down is to reduce the total loan amount. This helps to make your monthly payments smaller and instils more trust with the finance lender.
How to get the best car finance deal.
Now you know the car finance pitfalls to avoid and feel like you can make an informed decision, let’s look at some easy tips on how to get the best and cheapest car finance deal!
Improve your credit score.
Your credit score is important when borrowing money. Usually, the best car finance deals are awarded to those with the best credit scores. This is because based on their previous history of borrowing, they are less likely to default on their future car finance. If you have a low score, car finance could still be possible, but you may not get the most competitive interest rate. Take some time to improve your credit score if you are in this position.
Apply for what you can afford.
Car finance allows drivers to get a car they may not have afforded with cash alone and it makes newer cars more obtainable. It can be easy to get carried away with which cars you can get on finance but it’s essential you only apply for what you can afford to pay back. Lenders will also check your affordability to ensure you can make your payments each month and that your situation isn’t likely to change any time soon.
Short loan term.
It can be tempting to spread your car finance deal over the maximum 5-year term as it can lower your monthly payments. However, paying your car finance for longer increases the amount of interest you’ll pay. Lenders set higher rates because ideally, the want their money back as soon as possible. Choosing the shortest loan term for your budget can help to get you a better deal.
