Article by Kiah Phillips - 8th October 2018

How To Get The Best Car Finance Deals

New car sales may have slowed in recent years, with the economy, emissions scandals and Millennials all being cited as the root cause at one point or another. But the number of people choosing to use credit as a means of driving away in a new car continues to rise, according to figures from the Finance & Leasing Association which shows that the new car finance market grew by 15% in July 2018 when compared to the previous year.

More than 88% of new car owners that use finance to purchase a new car do so at the dealership itself, even though other cheaper options are available that could potentially save them thousands of pounds in the long run. Pressure to get the deal over the line there and then, a misconception that the lending decision is different if it’s done in face-to-face or a simple lack of awareness that there are other options out there, are all factors in this strange trend.

How to finance your car for less

Something we’ve written about in the past, the trick to getting the best deals for car finance depends to a large extent on what your Credit Report says about you.

Whether you choose Personal Contract Purchase (PCP), Hire Purchase (HP), Leasing or a Bank Loan to help you get behind the wheel, you will be subject to a credit check - the outcome of which will determine whether or not you will be accepted. If you’re not leasing the car, it could also determine how much you’ll pay in interest – regardless of the headline rate.

The ‘cheapest’ form of finance will depend on a range of factors including what level of deposit you have, how much you can afford to pay each month and whether you want the option of owning the car at the end of any fixed repayment term.

Getting a car on PCP

PCP arguably offers more flexibility than any other car finance product: after paying a deposit, you will make monthly payments (typically for two to four years) before being given the option of returning the car or making a final ‘balloon payment’ for the rest of the value of the car to fully secure ownership.

PCP usually requires a deposit of around 10% at the start of the agreement, but the amount you pay monthly will depend on the value of the car, the length of the contract and the amount of interest you end up paying. This last element is determined to a large extent by your overall creditworthiness, which in itself is determined by your past Credit History and the information that lenders share about you via the UK’s main Credit Reference Agencies.

Getting a car on Hire Purchase

Hire Purchase acts more like a traditional form of financing in the sense that you continue to make monthly payments towards the overall debt until it is paid off in full. The monthly contributions are likely to be higher than on PCP because there is no balloon payment for the rest of the car’s value and the APR is usually more than that of a bank loan.

Similarly to PCP, the interest is calculated based on the information found on your Credit Report, so making sure everything on yours is in order before applying for finance will help ensure you get as close to the advertised rate as possible.

Leasing a car

If you lease a car there’s no option to ‘own’ it outright at any point, but it is an increasingly popular way to get access to a new car. Lease deals usually involve a deposit, followed by fixed monthly payments for an agreed amount of time – for example ‘2 + 23’ (2 payments in advance followed by 23 further payments). Deals are available for business and personal contract hire.

You’ll still need to pass a credit check to be offered a lease contract in the first place, but the outcome of the credit check won’t determine how much you pay monthly.

Taking out a bank loan for a car

If you take out a loan from the bank to cover the cost of the car, you can expect to make monthly payments to pay off the loan, much the same as you would on Hire Purchase. Financing a car in this way does give you the flexibility of shopping around, and so you may be able to find a lower APR than you would if you were to take out a Hire Purchase agreement. The main downside is that there is no option to return the car once you’ve purchased it and you may be subject to an early settlement fee if you want to pay off the loan early.

Shopping for the best APR

When shopping around for finance deals, remember that you’re not guaranteed to get the headline rate that you see. This ‘representative APR’, is simply the rate that at least 51% of people must be given – meaning that almost half of accepted customers will be offered a higher rate of interest.

Known as ‘rating for risk’, this means that the best deals are reserved for customers with the strongest Credit Ratings – effectively those that are perceived as most likely to repay any borrowing on time and in full.

If you have held any form of credit - such as credit cards, loans, a mortgage, or a contract mobile phone - at any point in the past six years, the way you have made payments each month will count towards your overall Credit Rating, for better or worse. A spotless repayment history is likely to see you qualify for a headline rate, whereas the presence of late payments or other adverse information could well mean that you are offered a higher APR. Depending on just how serious any record of arrears is, you could also be turned down altogether.

In addition to your payment history, your Credit Report will also show a potential lender other important information including your Electoral Roll status, any financial associations, court records and more.

Find out more about what lenders check when you apply for credit

What’s the cheapest way to buy a car?

Because dealers want you to take out finance (they are likely to make commission on selling it for a third party), it can often work out cheaper – in terms of the headline price at least – to purchase with finance, rather than with cash, however counter-intuitive that might seem.

Of course, that doesn’t necessarily mean that it will cost less overall, as any interest charges will soon add up, but it is a good demonstration that there’s not really a single answer to this question.

It depends entirely on your personal circumstances as to which method is best, but assuming you do go for finance, a simple fact is that the lower the interest rate, the cheaper it is. And that’s why your Credit Rating is so important.

What Credit Score do I need to buy a car?

Your Credit Score is only really intended to give you an idea of the ‘health’ of your Credit Report and the information it contains - it doesn’t actually determine whether or not you’ll be accepted for finance. Each lender uses its own scoring criteria, based on the sort of customer they want and the level of risk they are prepared to take.

For that reason, you should focus on the data on your report than the score itself if you are looking to find out how a typical lender might rate you. If you have a poor credit history, or no history of borrowing at all, you may be limited in the number of lenders that will be willing to offer you finance, or at the very least, you may be offered a higher APR.

To see what lenders will see when they assess your application for finance, you can try checkmyfile free for 30 days, then for just £14.99 a month afterwards, which you can cancel online at any time. You’ll get complete access to the UK’s most detailed Credit Report, and see if there’s anything likely to block your chances of getting accepted for car finance before you apply.

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