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The ABC of car finance

Car finance can be confusing and there are many things you should know before you apply! Around 4 in 5 cars in the UK are bought on finance and this number is set to increase. With so many people choosing to finance or lease their next car, should you join the car finance revolution? Refused Car Finance have put together everything you need to know about car finance, popular car finance jargon, car finance myths and also how to get car finance with different personal circumstances.

What is car finance?

The main idea of car finance is to spread the cost of owning a car into affordable payments each month. There are 3 main types of car finance agreements which includes personal loans, hire purchase (HP) and personal contract hire (PCP). A personal loan can be used for anything but it’s a great option for buying a car! Because the loan can be used for anything, the full amount you borrow can be used to purchase a car which you will be the legal owner of straightaway. Choose how much you want to borrow and over what length of time and then make your repayments on time each month. Hire purchase is one of the most straight forward car finance agreements. Within a HP agreement, you agree to pay back your loan amount over a fixed period each month. However, you don’t own the car until you have made the final payment! Personal contract purchase is similar to hire purchase where you make your repayments each month over a fixed term but at the end of your agreement you have three options. You can hand the car back, pay the final balloon payment or part exchange the vehicle and use it towards a new PCP deal. Each one has different benefits and the one that’s right for you will depend on your personal circumstances and preference.

Understanding car finance jargon

As mentioned, car finance can be confusing but it doesn’t need to be! When finalising your car finance agreement, you don’t want to feel out of your depth when it comes to financial jargon. There are many words that come into a car finance agreement which you may not have heard before so it’s a good idea to do your research before you start applying! Here are some of the most popular phrases and what they actually mean:

Annual Percentage Rate (APR): The amount of interest you pay every year on a loan.

Balloon Payment: The balloon payment is the final payment of a personal contract purchase agreement which enables you to own the vehicle.

Equity: The difference between the value of the vehicle and the amount owed on the agreement.

Conditional Loan/Conditional Sale: A car finance agreement where you agree to buy the car at the beginning of the agreement and you automatically own the car at the end of the agreement once all your payments have been made.

Guarantor: A guarantor is a person who agrees to take over payments of an agreement if you are not able to pay back the amount borrowed.

Refinancing: When you already have a car finance deal but you want to review the contract to get a better deal.

Car finance myths

When car finance was first introduced, there was a lot of uncertainty and many myths relating to your deal. You may have already heard some of them so here are the most common car finance myths busted!

  1. You can only get car finance from a dealership. Many people have believed for years that you can only get car finance from a car dealership. There are many online car finance providers who will give you quotes for free and customers are encouraged to shop around for their car finance before even stepping foot in a dealership.
  2. You can’t get car finance with bad credit. We’ll come to this one further down in this article but in simple terms, you can apply for car finance with bad credit. Car finance is becoming more accessible for people with many different types of circumstances and there are many car finance providers who specialise in helping people get car finance with bad credit.
  3. You need a deposit. It can be hard to have a deposit saved up for your next car so that’s why many finance companies offer finance deals with little or no deposit options! Putting down a deposit can lower your monthly payments as you will have already paid off some of your loan but it’s not a necessity!
  4. You can’t pay off your loan earlier than agreed. In most car finance agreements, you are able to pay off your outstanding balance in full at any point in your agreement. You may however have to pay some early settlement charges so it’s best to check before you make a settlement payment.
  5. Car finance is guaranteed. This is probably one of the most common misconceptions. Car finance is becoming more accessible these days but it is never guaranteed. Advertising ‘guaranteed car finance’ goes against advertising standards as not everyone can get accepted for car finance. Finance providers and lenders have different criteria which needs to be met before they approve customers for car finance.

Car finance for different personal circumstances
As mentioned, car finance isn’t offered to everyone but there are many options available for different personal circumstances. When car finance was first introduced, the regulations were a lot stricter when it came to acceptance criteria. There are now options available for self-employed, car finance on benefits, bad credit car finance and even military car finance!

Self-employed car finance – Self-employed car finance can be hard as lenders tend to look for at least 3 months’ worth of bank statements to prove affordability and income. This can be hard if you get paid cash in hand and your work load can often vary. But not to worry! If you are paid in cash in hand it’s a good idea to deposit this into a UK bank account as soon as you get it so it makes your income easier to prove. You can even consider a joint application with a spouse or partner or apply for car finance with a guarantor.

Benefit car finance – Many car finance providers accept people who receive benefits. This can include applicants who receive income support, child tax credits, working tax credits, disability allowance, carers’ allowance and personal independent payment (PIP). When applying, you will be usually asked to provide a breakdown of benefits and usually provide proof of the benefits you receive.

Car finance with bad credit – As mentioned, car finance with bad credit is not impossible! If you know you have bad credit, you could work on improving your credit score before you start applying for car finance. As long as you are able to prove your affordability and your current situation, you should be off to a good start! A bad credit rating can be due to a number of factors such as defaults, bankruptcy, county court judgement and any missed payments in the past.

Military car finance – Car finance can be hard when you live in barracks, have a naval address or move around a lot. However, there are many lenders who accept military car finance.

Claire James

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