Getting a car or van on finance is a great way to spread the cost of your next vehicle into affordable monthly payments. Getting approved for finance can be really exciting but what if you don’t get the offered loan that you thought you would? There are a few factors that affect your car or van loan. Your loan repayments will be broken down into monthly payments with added interest. Having a higher interest rate will increase the amount of money you pay back overall. Let’s take a deeper look into which factors can increase your loan repayments and how to avoid them.
1. Credit score
Before getting approved for finance, many lenders will perform a credit check. A credit check helps lenders to see where you fall on the credit scale and your history of borrowing. If you’ve had trouble in the past meeting your repayment deadlines lenders tend to see you as more of a risk. This can increase the interest rate offered to reduce the risk to the lender. If you can, you can spend a few months repairing your credit score before you start applying for finance, you may be able to help reduce the monthly payments. In your financial life, having a better credit score can be beneficial. You can also benefit from higher credit limits, competitive interest rates and it’s easier to get accepted for loans or credit.
2. Deposit contribution
Many lenders will require a deposit contribution when applying for car finance and some lenders will want at least a 10% deposit for the car you want. For many people, it may seem counterintuitive to save up for a deposit for a car loan but having a larger deposit can be really beneficial. It means that you don’t have to borrow as much from a lender and reduce the amount that you need to pay back. Taking out a smaller loan is less of a risk to the lender so you can also benefit from lower interest rates. Even having a few hundred pounds for a deposit is better than no deposit and can increase your chances of getting approved for a car loan or finance.
3. Type of car finance agreement
There are a few finance agreements which tend to be the most popular in the UK. Hire Purchase and Personal Contract Purchase deals can both have different monthly payments on the same car, but it depends on what you want from your car finance deal. A Hire Purchase deal is secured against the car, and you spread the whole cost of the car into monthly payments, because of this monthly payment stend to be higher than other options. However, once the final payment has been made, you become the automatic owner of the car and there are no payments to be made. With Personal Contract Purchase, monthly payments tend to be lower as you are only paying off part of the value of the car. At the end of the agreement, you then have 3 choices, you can hand the car back to the dealer and walk away, pay the ‘balloon payment’ and keep the car or use the resale value of the car on a different car.
4. Check your eligibility first
Making multiple applications for a car loan in a short space of time can have a negative impact on your credit score. However, the make sure you get the best deal possible. It is recommended that you shop around for the best offer. You could consider using a car loan calculator before you apply for finance. You can set your monthly budget, the duration of your loan and what your current credit rating is and then have access to how much you would likely be able to borrow.
5. Loan duration
Most car finance agreements are spread across 1-5 years. Opting for a shorter loan term can increase your monthly payment price but you will pay off your loan quicker. Opting for a longer term can decrease the amount you pay each much but it also means you will pay interest for a longer time; this can mean you will pay more overall. If you opt for a longer term, you may also be offered a higher interest rate initially.