Things to Consider Before Getting Car Finance

Buying a car is one of the biggest purchases you're ever likely to make, so it's therefore important that you weigh up all of the positives and negatives before signing a contract.

A car can be expensive, and many people opt for some financial plan to help them pay for it. Over 90% of brand-new cars get bought using finance, and it's become increasingly popular to buy second-hand cars with a loan too.

You must understand what you're getting into when borrowing money for a car. Typically, these will last at least a couple of years, and you will have to make every monthly payment.

Do you have a car on finance and would like to reduce your monthly repayments? Sign up with Car Credible today; we could help you save money on your deal.

Failure to repay could result in life-changing consequences, such as having your car taken away and your credit score left in tatters, potentially causing issues when borrowing credit in the future.

If it's your first time taking out a loan to pay for a car, you're bound to have many questions. Even if you're a regular, car finance can still be overcomplicated. We're here to answer all of the frequently asked questions to help you make a decision that's best for you.

How long do car loans last?

Car loans are generally between 12 months (one year) and 96 months (eight years) in length. The average car loan length in the UK is around five years, though you can determine how long you wish to borrow money based on your circumstance.

Will car finance affect your credit score?

Car finance will impact your credit score, just like any other type of loan would. It can affect your score positively or negatively, depending on how well you manage your loan.

If you make your monthly payments on time, the chances are that your credit score will increase over time because you are proving that you can borrow a large sum of money and pay it back.

Should you miss a repayment, either by mistake or because you couldn't afford it that month, it's likely to affect your credit score negatively because you aren't conforming to the credit terms you signed and agreed to.

When you apply for credit, your score may get impacted before you've even made repayments. That's because a hard credit check appears on your credit report.

If you make too many applications in a short space of time, it could deter lenders from loaning you the money because you could appear high-risk, especially if you get rejected several times.

Will car finance affect your mortgage?

Like car finance, your credit score gets scrutinised when you apply for a mortgage. If you already have a loan on your credit report, the likelihood is this could help or hinder your chances of the best mortgage application, depending on how good you are at making your repayments.

If you have made your monthly payments on time and have a faultless record, it's unlikely to impact your chances of the best mortgage rates, as it shows you to be reliable and trustworthy when it comes to borrowing money.

Should you fail to make even one car finance repayment, that will show up in your credit history, and mortgage lenders could be hesitant to approve your mortgage application, in case you fail to make those repayments too.

What types of car finance are available?

The most popular car finance loan deals are Personal Contract Purchase (PCP) and Hire Purchase (HP). It's also possible to take out a personal loan if you want to own the car from the offset. 

Personal Contract Purchase (PCP)

PCP is the most popular way to take out a car finance agreement in the UK. It is ideal for those that want to change their car regularly and make lower monthly repayments. 

At the end of the agreement, you can make the final balloon payment to own the car outright or hand the vehicle back to the finance company with no further liability, provided you have taken care of the motor and have not exceeded the mileage allowance.

Hire Purchase (HP)

HP is more straightforward than PCP. You make your fixed monthly payments, and at the end of your term, you own the car outright without having to pay anything more for the vehicle.

Personal loan

A personal loan is a loan that a bank or other lender makes that is not secured against your car, often called an 'unsecured loan'. You can use this loan to buy a vehicle so that you own it from the outset.

It's unlike an HP or PCP, where the finance company owns the car until all sums due in terms of the agreement get paid. You will still have monthly repayments to make to the lender. 

Is it easy to get out of a car finance deal?

Several factors may result in you being able to get out of your car finance deal early, provided you can meet certain conditions, and you have a deal that lends itself to getting out before it ends.

Contact your lender

You should first contact your lender to see what your options are. You may also want to read through the contract to identify any potential stumbling blocks to getting out of your deal early.

Your lender may tell you that you must settle any finance before getting out of your contract, or you may be able to hand the car back and walk away without paying anything more, also known as a voluntary termination.

Are you in positive or negative equity?

You should try to identify whether you are in positive or negative equity. You can sign up for Car Credible and find out that information. We will update your car finance deal every month so you can stay on top of your position.

If you're in positive equity, you could part-exchange your existing car and use your equity to put towards the deposit on a new vehicle. If you are in negative equity, you could still get out of your current car by paying the difference.

Do you want to keep the car?

If you want to keep the car but you're only partway through your deal, you would have to get your early settlement figure from your lender and pay the money required to own the car outright and end the finance deal.

If you are coming to the end of your deal and are on a PCP, you would need to pay the balloon payment to own the car outright. If you want to keep the car but can't afford the balloon, you could refinance to continue paying monthly finance at a lower rate.