06/02/2020

Car finance: what’s the deal?

06/02/2020

Car finance: what’s the deal?

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When it comes to buying a car there’s more to the decision than simply picking a make and model.

After property, a car is often the second most expensive thing a person will ever buy, making it important to ensure you find the right set of wheels and deal for you.

Cars can be expensive, there’s no denying it. From the original price to running costs, finding something that is within budget whilst still meeting all your needs is a priority for most.

There are several ways you can finance a car, and they all come with their pros and cons. Each one also affects your credit file in one way or another, so it’s vital to never lose sight of the magnitude of the financial commitment you make when buying a car.

Here we offer a guide to help you navigate your way through finding the right payment methods for you and as well as a tankful of knowledge.

Types of car finance

There are several different ways to finance a car, so here’s a breakdown of each one, how it works and how it can help you.

Hire purchase (HP)

This is one of the most common methods of financing a car and the simplest.

The dealer or provider will loan you money for your car and pay them back. You pay a deposit, usually around 10%, towards the car you want, and then pay a set monthly payment for a fixed period of time

This method is a great way to help steadily build up your credit score and get a car when you can’t afford to buy one outright. However, you won’t own the car until you have made all your payments, meaning the agreement is secured against the vehicle itself.

If you fall behind on your payments, the dealer could take the car from you. It’s also important to make sure you shop around before deciding on an HP agreement as you could be hit with high-interest rates depending on your situation.

Personal Contract Purchase (PCP)

This is a type of car finance for those who like to switch up their car regularly and is commonly known for having lower payments than regular HP. The main difference here is that you’re given options once you have reached the end of your payment agreement.

You have the option to:

  • Return the car
  • Pay the balloon payment to own the car fully
  • Trade it for a new one

You’ll again need to pay a deposit of usually around 10% and the agreement is secured against the car. However, it’s important to note that you’ll need to agree a set number of miles that you’ll driving during your contract and you will be charged if you go over this.

Charges will also apply if you hand the car back with damages on it, so you’ll need to be careful with the car whilst you use it.

Personal Contract Hire (PCH)

This type of finance is a form of lease, where you never fully own the car. This can often be a cheaper option than PCP for those who don’t want to by the car at the end of the contract.

With PCH, all costs for your car tax and servicing is included, so the only additional cost for you to pay is fuel. Once you have reached the end of the contract, you then have to hand the car back, there’s no option to trade it in or own it.

Like PCP, you’ll need to agree a set mileage in your contract and will be charged for going over it or handing the car back damaged. On top of this, you’ll also be charged if you want to end your contract early.

What kind of credit score do you need to buy a car?

It’s always best to check your credit score before considering buying or financing a car, as this will influence whether your application gets approved or not. It’s advised by credit reference agency Experian to check this way in advance to allow yourself time to make any necessary changes.

The score needed to qualify for a car loan or finance will differ across the board, especially since some use different scoring models to determine what’s a good score or not.

Can I get car finance with bad credit?

There are lenders out there who make it possible to get car finance with a lower credit score, some even specialise in it. However, the loans or agreements often come with higher interest rates or conditions that don’t go in your favour.

Improving your credit score

The best way to improve your score is to make sure all your accounts are being paid on time. If you also manage to reduce the balances, then your score will inevitably go up.

Understandably, if you’re a Carrington Dean client, it will be difficult to improve your score as Trust Deeds and the Debt Arrangement Scheme (DAS) are noted on your credit file for the duration of your arrangement. If you’re looking to get car finance, then you will need to get permission from your Trustee.

What if I have a car on finance when entering into an arrangement?

If you have a car on finance before you enter a Trust Deed or DAS, then you will be expected to continue to pay this due to the debt being secured against it. However, it can be added to your arrangement if you hand the car back and still have a balance owed.

If you’re struggling with your finances, then contact us today for free and confidential advice. Our experts are on hand to help you deal with your debts in a way that’s affordable to you – so call us on 0808 2085 195 or click the button below to be connected to an advisor.

You could write off up to 75% of unsecured debt with our debt assistant.

Get free debt advice today

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