A staggering 90% of new cars sold through dealers in the UK are currently bought on finance, which signifies just how popular this form of purchasing continues to be.
Car loan contracts allow all types of people to get behind the wheel, by covering the cost of their vehicle via pre-agreed monthly payments, on terms that are suitable for them. This can be very helpful for those of us who cannot afford to pay for a new (or used) car outright.
However, entering into any loan contract is a rather big commitment, which is why you must ensure you have carried out enough research and are fully ready to do so before signing anything.
We discuss several key questions to ask yourself before entering into a car finance agreement.
- Do I have enough for an initial deposit?
The majority of car finance providers will ask for an initial deposit, which will vary from lender to lender and based on your own circumstances. If you don’t have enough cash to make this preliminary payment, you may wish to save up for a few months first before doing so.
Some lenders do, however, offer no deposit car finance, but in these cases, the monthly deposits you will pay back are typically a lot larger. Similarly, if you can pay a substantial initial deposit, then your monthly payments will be lower. It is worth thinking about your personal financial situation beforehand and then deciding which option is best for you.
- Is my credit rating strong enough?
When purchasing a car on finance, your credit rating is used as a measure to determine how safe you, as a borrower, are perceived to be. Before deciding whether to grant a loan, finance providers will look at your credit history in order to gauge your ability to pay debts on time and how well you manage your money.
Having a poor credit score can negatively affect how much you pay for car finance, as you are likely to only be offered those with high interest rates, whilst some lenders may reject your application completely. As such, it is wise to try to raise your score before you decide to go down the car finance route.
However, there are many modern finance lenders which are open to lending to people with poor or no credit scores, so even if you are in a sticky situation, you might still be able to get behind the wheels.
- Will I be able to make my monthly repayments?
Almost all car finance contracts require borrowers to pay back the loan in monthly installments. The amount will have been negotiated before entering into the agreement, though many providers will allow people to renegotiate terms and lower repayments if financial problems arise.
That being said, it is extremely irresponsible to enter into a car finance agreement without being absolutely sure you can make your monthly payments. If you are in an unsteady job or have failed to pay off debts in the past, it is certainly wise to think twice before signing the dotted line. People who fall behind on car finance payments are often charged additional fees, and could negatively affect their credit rating, which has long-term consequences.
- Can I afford to run the car afterwards?
When thinking of buying a car, many of us fail to take into consideration all the additional costs that come with being a motorist. There are, of course, a whole host of other ongoing expenditures, including car insurance, MOT, tax, parking charges, petrol and servicing. All of this adds up and means that being a driver does not come cheap, which is why you should think long and hard about whether, in your current financial situation, it would be sensible to purchase a car.
Creating a monthly list of ingoing and outgoing expenses, and setting yourself a budget will help you determine if it is feasible at this time. Moreover, if you live in a big city like London, it might be more practical and cost-effective to take public transport instead of buying a car.