The world of car finance can be complicated with all the loan options and interest rates, among other things To make the process of buying your new car more simplified, we wanted to outline some of the main things you need to know about car finance so you can be prepared.
What is car finance?
Car finance is essentially an agreement made between you and a lender for credit you have borrowed and have said you’ll pay back towards a vehicle. Interest is attached as an added payment for borrowing the money.
What are the different types of finance available?
HP - Hire Purchase
With Hire Purchase you pay a deposit, which can be zero, followed by monthly payments created from a combination of the total vehicle balance plus the interest. The car is owned by the company throughout the entire policy, up until the final payment is made by which then you own the vehicle.
PCP- Personal Contract Purchase
This agreement is very similar to hire purchase, but is great if you want to enjoy upgrading your vehicle often and want to have that choice, or for the option of cheaper monthly payments. As usual you pay a deposit, which again can be zero, then pay fixed monthly repayments. The main difference between this and hire purchase is that you have three options at the end of the agreement to do with your car:
-Pay the remaining value of the car (known as a balloon payment) and own the car
-Exchange the car for an upgraded one
-Return the car to the supplier
Lease Purchase
Similar to PCP, this finance agreement means you’ll never have the opportunity to actually own the car, as you are essentially renting it out. Also, you’re able to change your car every 2-3 years which means it’s an affordable way to drive a vehicle you may not usually be able to afford to buy. The payments you make are like rent free and you’re paying for the depreciation of the vehicle.
Personal Loan
Finally, there is always the option for a personal loan. Just as you’ve probably guessed, you can go into a bank or building society to borrow the money. Once you’ve bought the car with this money, you are instantly the sole owner, and you then pay back to the lender. Again this has interest on top as a charge for borrowing the money, but it’s not owned by the lender or finance company. This is a great option if you’re happy to stick with one particular car for the long term.
What is 0% car finance?
A 0% car finance deal is in short like a standard finance deal, but without the added interest. You spread the cost and pay monthly repayments and are not penalised by being charged extra.
You typically need a good credit score and history to be approved, and are generally available on personal contract purchase (PCP) and hire purchase (HP) finance deals.
Can I be accepted for car finance with bad credit?
Lenders are more likely to accept and give people loans who have a strong credit history (that you’ve kept up with regular repayments), as you appear a trustworthy customer for making repayments on time. If lenders can see this, you’ll have access to a greater selection of loans and lower interest rates.
People with a poor credit history, on the other hand, are more likely to be refused a loan because finance companies are afraid of anyone who has a history of not paying on time. As a result, they are less likely to give reasonable rates – or perhaps refuse to offer a loan at all.
To improve your chances of being accepted, it’s a good idea to analyse your credit report. You can gain access to this through sites such as Experian, to give you an indication of where you’re going wrong and where you can improve your chances.
Ensuring you register on the electoral roll is also another option as finance companies check this whenever you apply. This is to double check your name and address match, speeding up the process of verifying your identity and address to ensure no fraud is being committed.
Another option is to perform more eligibility checks (or soft searches as they’re known), rather than actual loan applications (known as hard searches). This is because the more hard searches you complete, the higher the negative impact on your credit history will be. Alternatively, performing a soft search won’t appear on your credit report, and will still give you a good indication of if you can be accepted, even if it doesn’t tell you for certain.
Increasing your deposit is also a smart idea as this will lower the overall amount of money the finance company has to lend you, therefore lowering the risk for them if you make late repayments.
Applying for finance with Rix
Rix works with a variety of lenders and offers hire purchase agreements so there are no large payments at the end of the contract term and affordable monthly payments over 12-84 months, depending on your needs.
We can work with you to settle off existing finance as well as negative equity as well, to make obtaining finance as easy as possible for you.
Simply go through our easy to use finance application, and we’ll perform a soft search which won’t harm your credit score. You’ll then be shown which loans you’re likely to be accepted for all helping to get you prepared before you apply.