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Cheap Car Finance – Common Questions Answered


Updated
30 Jul 2018

Red Renault Clio

In the UK, a whopping 86.5% of new cars are bought on finance each year. But, despite this glaring statistic, many drivers admit to not fully understanding all the facts surrounding cheap car finance.

For many people, it might be their first time acquiring a car loan, which means that understanding the types of car finance, interest rates, terms of repayment and other factors can be somewhat overwhelming.

We answer the common questions asked, so that you are equipped with all the information you need when deciding whether to purchase a new or used car on finance.

Cheap Car Finance Explained

What types of car finance are there?

The two most popular car finance types are Hire Purchase (HP) and Personal Contract Purchase (PCP).

In HP agreements, the borrower pays an initial deposit of around 10% (depending on the lender) and then pays a fixed monthly instalment, of which the length and repayments are agreed upon beforehand. Once all of these are paid off, the car legally belongs to you. HP agreements can be finished earlier on if the borrower has the funds to pay off the debt remaining on the vehicle.

With PCP loans, an initial deposit is also paid, followed by fixed monthly instalments. At the end of the PCP agreement, the borrower has several options. Including purchasing the car outright using a balloon payment, returning the vehicle or selling it privately.

The final balloon payment will be agreed upon beforehand and is worked out as the estimated value of the car at the end of the loan term, by factoring in depreciation.

Where can I take out a loan?

A very common misconception surrounding car finance is that the borrower can only take out a loan from the dealers of the vehicle. This often means people are taking out bad loans, which are not always the best choice for them. As such, it’s important to shop around and try to find the best loan deal for you and your personal circumstances.

Searching for the best car finance deals should, however, be carried out with caution. If people make a number of full loan applications from several different lenders within a short space of time, this may trigger alarm bells and could negatively impact credit scores.

Instead, it’s best to only carry out ‘soft searches’ when looking for cheap car finance quotes, saving a full application only for the lender which you have decided is best for you, at which point a credit history check will be carried out.

What is the difference between a soft credit check and a hard one?

Two types of credit check exist; ‘soft’ and ‘hard’. A soft search is only a background check and can include a person checking their own credit score, or a pre-approved loan offer. Sort searches do not affect your credit rating.

A hard credit check, on the other hand, will show up in your credit history and can affect your overall score. These will be carried out when full applications are made when applying for loans, so be sure to only make applications with lenders you intend to enter into agreements with.

How long does it take to get finance?

Many traditional finance lenders or dealers will require written personal information before a deal can come to fruition, which obviously would take some time. However, with the rise of many online car finance providers, the process has become significantly shorter and less complex. As such, online dealers can now find quotes in a matter of minutes, and borrowers can fill out application forms very quickly too.

Will car finance affect my credit score?

Another common myth about car finance is that entering into a loan agreement will negatively affect your credit rating. However, the opposite can be the case, especially where a borrower makes their repayments on time, therefore showing lenders that you are a low-risk borrower.

It is, therefore, essential to ensure you only take out a loan which you know you are capable of repaying on time. Keeping your credit score as clean as possible is important for being able to negotiate good loan agreements in the future.

Can I pay off my finance deal early?

Borrowers are certainly allowed to pay off their outstanding debts during their car finance agreements, but this can sometimes mean additional charges are added on. If you intend to do this, make sure you thoroughly check the paperwork on your loan deal before signing.

Can I exit the contract early?

Sometimes, things do not work out as planned and a person’s financial situation can change, which is why Voluntary Termination (VT) may be necessary. This means a person can legally exit their loan agreement earlier on than agreed, but only once 50% of the value of the loan has been paid off.

Whilst each different finance provider will have their own term regarding a VT, in the majority of cases, it should not be an issue, so long as the borrower has been able to keep up with monthly payments and the car is handed back in good condition (if not, extra charges may apply).

In most cases, the borrower won’t have to pay any extra fees and their credit rating should not be negatively affected. However, if a person does invoke their VT right to opt-out early on, this is placed on your file and could mean lenders may refuse to grant you finance deals in the future. An early termination should therefore only be used where absolutely necessary and people are always encouraged to only take out finance deals that they are certain they can pay back.

Am I eligible?

At CarFinance Plus, we receive applications from all types of people, including those with no credit or bad credit, CCJ’s, defaults or payment arrears. Simply make an enquiry and we will see if we are able to help.

Our job is to match people with the right lender based on their personal circumstances, taking into consideration many factors, such as age, income, employment status, credit history and the loan type. Whatever your situation, do not hesitate to apply!

     
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