More people than ever are choosing to use car finance to purchase their next cars. In the UK, over 80% of cars are funded through finance or car leasing. With this in mind, if you haven’t had car finance before, you may be wondering if its right for you. There are a lot of misconceptions surrounding car finance deals and how beneficial they are to the customer. The guide below has been created to highlight the benefits of getting a car on finance and how it can help make owning a car more manageable.
How does car finance work?
Car finance is a simple way to borrow money to fund your vehicle purchase. In the UK, there are three main types of car finance which tend to be the most popular and affordable. They are a personal loan option, hire purchase and personal contract purchase deals. Each agreement has its own terms and conditions and may suit some people over others. In general, though, car finance allows you to borrow an amount, either into your bank account (personal loan) or secured against a vehicle (hire purchase) which you then pay back. You make monthly repayments with added interest till the end of the agreed term. Car finance with low interest rates mean that you won’t pay as much back in additional fees. Car finance agreements can last anywhere between 1-5 years and some finance deals can even be spread over 7 years! You can either choose to own the car from the start of the agreement or you can own the car once the final payment has been made. In agreements such as hire purchase and PCP, you don’t have to own the car at the end of the agreement if you don’t want to and can change your car more freely.
Benefits of getting a car on finance
There are a number of ways in which getting a car on finance can influence your financial life.
Spread the cost
The biggest benefit of getting a car on finance is that you can spread the cost of owning a car. By breaking down your loan into affordable monthly repayments, you can make owning a car more manageable. Financing your next vehicle allows many drivers to own and driver a car even if they are on a tight budget. There are car finance packages that can suit a whole range of different personal circumstances and monthly affordability. Some car finance agreements do require a deposit and it can be beneficial to put more in for finance as you reduce how much you need to borrow. However, there are also many no deposit deals available if you need a car in a hurry.
Get a better car
By spreading the cost of your chosen car, you can usually get a better and more expensive car than you would when buying with cash. Not only can you get a newer, more modern car but you can also get a safer and more reliable model. Car finance enables you to get a brand new, nearly new or used car on finance, depending on your budget. If you’re unsure of how much you can afford to spend on finance, you can use a free car loan calculator to get an accurate idea of how much you could borrow.
Improve your credit score
It’s a common misconception that getting finance or loans harms your credit score. When you first take on any new credit, finance or even a mortgage, your credit score can take a temporary knock. Car finance only usually affects your credit score if you fail to pay your loan back. Getting a car on finance and making payments on time each month can actually help to improve your credit score. As long as you meet your finance payments and any other financial commitments you may have on time and in full, you can reap the benefits on your credit file!
Protect your savings
Cars can be expensive to buy outright, and it can take months for you to save up for a car. Car finance allows you to protect your savings account and save the money for a rainy day. Instead of emptying your savings account, you could use part of your money as a deposit and then spread the cost into monthly payments. This way, you can get a car and still have money available to keep adding to your savings pot.
Fixed rates
Car finance agreements tend to have fixed payments to help you budget properly. This means that throughout your term, your payments and interest rates won’t vary. Instead, you know exactly what you are paying each month until the end of the term. Even if interest rates or the cost of borrowing fluctuates over the course of your agreement, you don’t have to worry, your rates will stay fixed for the duration.
