More people than ever are choosing to finance or lease their next car. If you’ve never had a car on finance before, you may be wondering how a car finance deal could benefit you and if it’s the right funding choice for your next car. Most cars nowadays, both new and used, can cost thousands of pounds to buy outright and the majority of drivers don’t have this kind of money to hand. Buying a car with cash can be cost-effective but you may not want to empty your saving fund or have the cash to hand. This is where getting cars on finance UK can be a great way to spread the cost of owning your next vehicle. The guide below looks to explore how car finance can benefit you.
How does car finance work?
Car finance is a simple process that allows a consumer to borrow money from a trusted lender to fund their next car purchase. Usually, you would borrow a set amount, either secured against the vehicle you choose or not, and then make monthly repayments to the lender with added interest. It can be possible to get a 0% interest car finance deal, but most lenders do require interest to be paid to reflect the cost of borrowing. The interest rate you are offered determines how much you pay back overall and can be affected by a number of factors. A lower interest rate is better as you don’t pay as much back but can be reserved for those with better credit score or have a long history of reliable borrowing.
Benefits of getting a car on finance:
There are many misconceptions around getting a car on finance and if it will be a smart move for you. Many people think that getting a car on finance will harm their credit score or not be the best financial decision. However, there are many benefits to getting a car on finance.
1. Fixed payments
One of the best things about taking out car finance is that you always know how much you need to pay with fixed monthly payments. You can use a car finance calculator UK to get an idea of how much you can afford to spend on finance then shop the cars within your budget. Your budget for payments should be realistic and affordable as you will need to make all payments on time and in full. Fixed monthly payments help you to stay on top of your finance as your amount and interest rate won’t change during the finance term.
2. No deposit needed
Some car finance agreements may require or prefer you to have a deposit to put down for finance. However, there are many no deposit deals that you can take advantage of. If you’re struggling to get approved for finance, having a deposit may be beneficial as it helps to instil trust with the lender but also reduces how much you need to borrow. A smaller loan can be more manageable if you have a lower income or high levels of existing debt.
3. Get a better car
Car finance allows you to spread the cost of your chosen car into affordable monthly payments. Due to this, you can usually get a better car than you would if you were paying outright with cash. You can even get a cheap car finance deal on brand-new cars, as well as second hand vehicles. Car finance deals like PCP offer low monthly payments due to their structure. Instead of spreading the cost of your chosen car, you instead pay off the rate of deprecation which makes monthly payments much smaller than hire purchase deals. However, you won’t own the car unless you pay the large balloon payment at the end of the deal.
4. Build your credit score
Many people assume that getting finance will harm your credit score. However, if used correctly, your car finance deal can actually help to increase your credit score. Making payments on time and in full is one of the easiest ways to show good financial management. By meeting the deadlines of your finance repayments and any other financial commitments you may have, you can increase your credit score. This can also be a good option if you have less than perfect credit and want to get a better car finance deal once your current agreement has ended.
5. More flexible options
Getting a car on finance in the UK means you can benefit from a number of different types of car finance agreement. The most popular agreements include a personal loan, personal contract purchase and hire purchase agreement. Each one is different and can suit some people over other depending on what you want from your car finance deal. For example, a person loan can be good if you want to pay for your car outright, own the car from the start of the agreement and make any modifications you like. Agreements such as hire purchase and PCP are secured against the vehicle which means the lender owns the car through the agreement. However, you have the option to keep the car or hand it back to the dealer once all payments have been made.