Buying a car does not have to feel challenging when you are buying it outright, but if you are looking to finance it, it is crucial to re-evaluate your budget. Unprecedented soaring costs amid the shortage of new cars rolling off the production line raise doubts among people about their repayment capacity. There is an option of buying used cars or less expensive cars. Even so, car finance payments are the second largest household expenditure after mortgages.
If you are a first-time car buyer, you need to understand that car loans and car finance deals are two distinct financing methods. The former is available from private lenders and banks. However, banks do not easily accept applications for car loans for bad credit. In contrast, the latter is available from car dealers in the form of hire purchase and personal contract purchase.
Personal loans
You arrange a minimum 10% deposit and borrow the rest of the amount to purchase a car. The loan is paid down in fixed instalments over a span of months. You are the owner of the car from day one.
Hire purchase
HP is akin to personal loans, but the ownership is retained by your dealer until the final payment. They also require at least 10% down payment. Monthly instalments go towards both principal and interest.
Personal contract purchase
PCP deals involve smaller payments towards only depreciation. At the end of the contract, you have an option to return it or purchase it by making a balloon payment. It also requires a 10% deposit.
Here are some important points about car loans that you cannot ignore under any circumstances:
Despite putting a larger down payment, you cannot escape the consequences of a subpar credit history. Having a larger down payment or a stable income source does not guarantee your repayment capacity. In order to understand your payment behaviour, they will have to access your credit report.
You do not need to have an excellent credit score, but you should not have a subprime credit rating either. Your credit rating decides the rate of interest as well. A higher credit score will result in lower interest rates.
A decent credit score can improve your chances of being qualified for a car loan.
Whether you use an auto loan or HP, a loan deal cannot be said to be favourable because it involves smaller monthly payments. Most of the lenders are not flexible with repayment terms even though you wish to opt for a shorter repayment period.
Short-term repayment periods require larger monthly payments than long-term repayment periods. The latter makes you feel the deal is more affordable, but you overlook the fact that extended terms result in accrued interest. As a result, you end up paying a lot more money in interest.
If you choose a PCP, monthly payments are way smaller than personal loans and HP, but do not make the following mistakes:
Make sure that you do not exceed the mileage limit. Otherwise, you will have to pay additional charges.
Choose PCP only if you are certain that you will not buy a car at the end of the contract. If you decide to own it, you will have to make a balloon payment. This will cost you a lot more than the sticker price of the car.
PCP is a favourable option only when you run a fleet of cars, or you need it for a short period of time, or you keep changing your cars every so often.
Undoubtedly, a larger down payment cannot offset high interest rates in case your credit history is not up to scratch, but this can help you save money in interest. The higher the upfront payment, the lower the loan-to-value will be.
Though interest rates cannot be lower in case of a subprime credit history, a reduced loan-to-value will make you pay less interest. In order to ease some pressure of payments off your pocket, you should consider making an upfront payment whether you purchase a new car or a used car.
In order to ensure that you choose the most affordable deal, you will have to do some research. Get preapproval letters, as they will let you know what interest rates are potentially available from different lenders. Actual rates, though, will be higher than preapproval rates; this will help you be in control of your budget while making payments.
Do not rely only on direct lenders or car dealers when it comes to car financing. Compare the deals they offer to know whether personal loans are cheaper than financing deals or vice-versa. Further, banks and credit unions also provide bad credit car loans. You should check their offers as well. They will likely offer more affordable deals than car dealers.
While it is recommended that you must have a good credit score to qualify for lower interest rates, it does not guarantee this. Your credit score is not the be-all and end-all. Your overall profile will be assessed, which include perusing of income sources and a debt-to-income ratio. You should focus on your credit rating as well as repayment capacity to improve your chances of being qualified for an affordable car loan.
Though car loans for bad credit in the UK are available from car dealers and direct lenders, you should still try to work on improving your overall financial state to improve your chances of being accepted.
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