Car financing choices for young adults

Posted by Josh Conibear in Personal Finance on 27 February 2014 - Josh worked as a Credit Analyst at checkmyfile until 2014

With the cost of student living always on the rise, it is becoming ever more difficult to save for a functional car to commute from A to B.

So what options do young adults have in their early twenties?

Loan

A personal loan is the most popular way to finance a new car, according to a poll on whatcar.com, with 33% of buyers choosing this finance option. When looking for a loan, the most important thing to compare is the interest rate, expressed as an APR (annualised percentage rate) which factors in all of the year 1 costs of credit.

The golden rule with car loans is never to borrow for longer than you expect to keep the car for. If you change cars every two years (or if they only last that long), then the term of the personal loan should match. Another is to make sure that you put in what you can towards the purchase – say 20% - as this not only reduces the monthly cost, but also gives you a bit of headroom to sell the car if you find out that you really don’t like it and need to sell it.

Borrowing money from a bank, building society or other lender gives you instant ownership of a car.

Beware of early repayment penalties – if you take out a loan it’s always best to assume that you will repay it over the stated term. If you repay early it could cost you dearly.

Hire Purchase

With a hire purchase agreement, there is always a deposit to pay followed by fixed monthly payments. The car is in actual fact owned by the Hire Purchase company until the final payment is made.

As a result, the person making the payments has no legal right to sell the vehicle, though the law is quite complex on this and after you have paid a significant part of the HP, you do acquire some rights to the car, you just can’t sell it.

If you need to sell the car before the end of the agreement, you'll have to repay the outstanding debt first and early repayment fees may apply.

Most buyers carry out a car check before buying a vehicle, and this will show whether a car is subject to HP, so there are no ways around repaying the facility off in full if you wish to sell.

Dealer finance

You need to do a lot of homework when applying for dealer finance. There are many types of finance – Lease purchase, contract hire, straight lease, PCP and a lot more. Most deals are designed to enable you to buy a car that you wouldn’t normally be able to afford, with ‘reasonable’ monthly payments. Most require an upfront cost which is less than the deposit needed for HP or loans. Some have a massive balloon payment needed at the end of the term.

You need to check out every last detail of each deal on the manufacturer’s website.

When comparing deals, the most important thing to establish is whether you will own the car at the end of the term of the facility. Or, if the car has a guaranteed future value, whether that is anything like the likely trade-in value of the vehicle.

Dealer finance is not for the faint-hearted. You need to know what you are letting yourself in for.

Leasing

One of the cheapest ways of paying for a new car.

You’ll never own the car, but get the right deal and it can work out really well. Take a good look at Lings Cars and your eyes will be opened to a whole new World of car finance that you probably didn’t know existed.

The big thing with leasing is to chase the cheapest deals – there are always manufacturers and models which are in oversupply where great deals are possible – and don’t even think about starting out with the intention of a specific model, in black, with 20” alloys. You’d be well off the track if you did that. Another thing to bear in mind is that not all insurance companies provide cover for privately leased cars, though many do.

The advantage of a lease via someone like Lings Cars is that you just hand your card back at the end of the lease term – again try to set the term against how long you’re likely to want to keep the car. Then you can go for another one.

Credit Card

Although credit cards are fairly easy to obtain they are a totally unrealistic option for car purchase. Firstly, the APR is comparatively very high on cards, compared to loans. Secondly, however disciplined you think you’ll be with repaying the card quickly, it just won’t happen in real life. You’ll end up with a hardened, high interest, hard to shift debt.

Whatever choice of finance you make, unless you’re going to the Bank of Mum and Dad, you’ll need to have a decent credit score behind you. If you haven’t managed to build a decent credit record up in your early adult years, you need to start now if you have your eyes on a decent motor.

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