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Prepare your finances and documents
Before you apply for car finance, there are some things you need to consider in order to secure a good approval from your chosen finance company. Firstly, you should check your credit score as this is one of the most important factors that will affect whether you can get finance and what interest rate you will be given.
Your credit score will provide lenders with an insight into your payment history, spending habits and overall behaviour when it comes to money. This will determine how much of a risk it is to lend money to you, and if you appear to be a risk then you will receive higher interest rates. This is also the point where you can determine whether you are going to be able to apply for finance through a bank or building society, a high street lender or broker, or a specialist lender or broker that provide finance for those who have poor credit scores and are unable to secure finance elsewhere.
You should also gather all documents you might need when you apply for finance, as you will be asked to provide these. Generally, you will need to show a valid driving licence, proof of your address and proof of your income (either from bank statements or a payslip) This will vary from each lender you deal with; some may require more documents, some less.
One final point to make here is to add yourself to the electoral register if you haven’t already done so. Registering doesn’t improve your credit score, but it does make you more identifiable to lenders and reduces the chances of your application being fraudulent, which increases your likelihood of being accepted.
Types of car finance
Understanding the different types of car finance will be useful for you at this stage, so you can think about what you want out of your finance agreement and the car.
A Personal Contract Purchase offers flexibility and freedom when buying a car with relatively low interest rates. It’s a great choice for anyone who likes to change their car regularly, without owning it outright. Due to not owning the vehicle, you are essentially renting it off the dealership, which means that the deposit and monthly instalments that are paid are generally lower than other ways of financing a car.
If at the end of the contract you want to keep the vehicle, there is a lump sum called a ‘Balloon Payment’ at the end of the agreement that must be paid. Once you’ve done this, ownership of the vehicle will be transferred to you. If you don’t want to own the vehicle, simply hand it back and walk away or trade it in for another car.
At the beginning of the agreement you will receive from the dealer a Guaranteed Future Minimum Value for the car which is the minimum amount that the car will be worth at the end of your agreement. This means if the cars value drops in that time, you will be protected and if it stays the same or increases, you can use this towards a deposit for a new vehicle at the end of the agreement.
Hire Purchase is another way of financing a car. You will usually have to pay a deposit and monthly instalments, but they are usually smaller amounts compared to other finance agreements. The interest rates for Hire Purchase agreements on new cars is relatively low, but less so for used cars.
Conditional Sale is another popular method of financing a car and is similar to hire purchase. One you pay all of the instalments, ownership of the car is automatically transferred over to you, so there is no Balloon Payment with this type of finance agreement.
Poor or bad credit options
If you have a credit score that is less than perfect, you might find it more difficult to secure certain types of car finance and from certain lenders. Banks are certainly not an option, and depending on your credit score, you may have to apply to bad credit specialist lenders who will provide you with finance for your car.
Bad credit car finance works exactly the same as any other type of car finance although you will usually be subject to higher interest rates than someone who has a good credit score. By repaying your finance agreement each month on time, you will have built up a history of good credit, which improves your score and means that next time need to apply for any kind of credit, you may be able to have a better rate.
Many companies will advertise guaranteed car finance however this isn’t strictly true. If a company were to provide car finance for every single customer that applied, it would be very unethical and against guidelines set out by the Financial Conduct Authority. The FCA is an independent governing body who regulate the finance industry to ensure everything in line with responsible lending. Responsible lending not only protects the lender, but also the borrower, as taking out finance that you struggle to repay would be burdensome.
If you are declined, then it is a good idea to try and build up some credit with a credit builder credit card. These are specially designed to help you build up good credit by paying off a small amount on a credit card each month. Remember that any defaults and missed payments will drop off your credit file after 6 years. This means whilst they are on your permanent record, they won’t be visible to lenders when they do a credit check on you.
The finance agreement and your repayments
Once you have applied for finance and chosen a car, all that is left if for the finance company to pay the dealership for your vehicle and you’ll be ready to collect it. Read the terms and conditions of your contract carefully and ensure you keep up with repayments – if your loan is secured against your car it will be repossessed if you don’t keep up with your payment plan.