For many people, car finance is the way forward when it comes to funding your next vehicle. However, those who have never taken out car finance before may be wondering what the hype is all about. There are many myths surrounding car finance, and it can be hard to know what’s true and what’s not. It’s always good to keep in mind that car finance is never guaranteed and won’t suit everyone, but the guide below has been designed to explore the benefits of getting and car on finance and how it can help your financial life.
What is car finance?
Car finance is an easy way to help spread the cost of getting a car. You can pay for your next car in monthly instalments till the end of your agreed term. Car finance agreements can range from anywhere between 1-5 years, depending on the term and agreement that suits you. You can benefit from 0% interest on some new car deals, but most used car finance deals require you to pay interest within your monthly payments. Your interest rate offered can depend on your personal circumstances but usually the lowest rates are offered to those with better credit scores.
1. Get a better car
Buying a car with cash can be the most straightforward but it can be expensive. Nowadays, cars can set you back thousands of pounds to buy outright, and many people don’t have the savings to hand to pay for a car. Getting a car on finance means you can get a better car than you would with cash. Newer cars tend to be safer and more reliable than older cars and don’t tend to have as many problems. Some car finance agreements such as PCP allow you to pay for part of the cost of the car so you could even get a brand-new car with low monthly payments.
2. Flexible agreements
It’s a common misconception that getting a car on finance is a one size fits all agreement. However, there are a number of ways in which you can get a car and pay for it over time.
- Hire purchase. Hire purchase is a secured loan which allows you to spread the cost of your chosen car into affordable monthly payments with interest. You can split the cost over 15 years. The finance lender owns the car throughout the agreement but if you want to own the car, you can pay the final option to purchase fee and the car is yours to keep! The loan is secured against the vehicle, so the lender has the right to take the car off you if you fail to pay, making it an inclusive option for people with bad credit.
- Personal Contract Purchase (PCP). PCP car finance is similar to hire purchase but instead of paying for the full vehicle over the term, you only cover the cost of depreciation, this helps to keep monthly payments lower than other options. You will need to meet all repayments till the end of the term and then you have 4 options when it comes to owning the car. If you don’t want the car anymore, you can simply hand the car back to the dealer or use the value of the car to get another car on PCP. If you like the car and want to keep it, you can pay the large final payment or you can refinance a PCP balloon payment and keep driving the car you love.
3. Increase your credit score
Many people think that getting a car on finance will damage your credit score. However, if you stick to the rules of the agreement, you can actually use car finance to increase your credit score. Along with meeting all your other financial commitments, your car finance deal can help show future lenders that you can handle credit responsibly and opens you up to better interest rates and higher credit limits in the future.
4. Spread the cost into affordable payments
When it comes to getting finance, it’s all about affordability. It’s important that you can meet your repayments for the full duration of the term and still have money left over to enjoy life. That’s why it can be easy to budget when you get a car on finance, you can benefit from a fixed interest rate and fixed monthly payments, so you know exactly what you’re paying for the duration of your car loan.
5. Car ownership that works for you
The beauty of getting a car on finance is that you can choose whether you own the car or not. A personal loan allows you to borrow money from a bank or building society to buy a car outright and you will be the legal owner of the car from the start. This means you can modify the car and sell it when you’re ready. You can also choose to own the car within HP and PCP agreements too if you pay the final payment. Or if you get to the end of your term and decide you no longer want the car, you can choose to hand the car back too.