How to prepare for your car finance purchase
When you buy a new car there can be an overwhelming number of choices to make: old or new, manual or automatic, red or blue. However, one of the most important decisions you will face is how to pay for your car.
With a variety of car finance products available, choosing the one that is best for you will help to make the rest of your car-buying experience trouble-free!
Understanding your finance options
There are a number of car finance plans designed to help you to purchase a car, depending on how much you can afford and how long you want to keep the car.
• Hire Purchase: This option allows you to pay for your vehicle in monthly instalments. These payments cover the cost of purchasing the car so, by the end of the payment plan, you will have paid the full value of the car.
• Personal Contract Plan: Again, you pay for the car in monthly instalments but, unlike hire purchase, these payments are smaller and don’t cover the full cost of the car. If you want to keep the vehicle at the end of the repayment period, you would have to pay the remaining value of the car in a lump sum. Therefore, this plan may be better suited to drivers who would return the vehicle (be aware the mileage and condition of the vehicle will impact the value).
• Personal Loan: This loan option is not secured on the vehicle as you borrow money from a financial provider to then purchase the car you want. You own the car outright with no restrictions, and you pay the finance provider back the value of the loan. Generally, a good credit score is needed to get this loan.
• Fixed Sum Loan: Unlike personal loans, the car is named as an asset in your finance plan. This means you have to keep the car whilst you make the fixed monthly repayments, but you do also own the car from the start of the plan.
• Conditional Sale: This option means you commit to purchasing the car at the end of the payment plan. Payments can be made over a range of months and continue until you have paid off the full amount of the car, after which you automatically become the owner.
Picking the right budget
A recent research study into our attitudes towards debt has shown that 8% of adults have a car finance plan in place. The study by comparison site Knowyourmoney identified that Car Finance is the 4th most common type of debt.
Car Finance is considered ‘good debt’ as it is intended to benefit you in the long term. Car finance can be paid off in instalments over a set period of time, spreading the cost across a monthly budget. For individuals facing numerous other monthly bills, the cost of car finance must be factored into your budget. To ensure your car finance repayments are affordable alongside your other expenses, you need to work out how much you spend on rent/mortgage repayments, bills, living costs, leisure activities, and any other debt payments. Knowing your exact expenditure will show you how much you can spend on a new car. Cars cost money to run too, so it’s especially important to include their costs in your budget. Insurance, servicing, road tax, and fuel are expenses that shouldn’t be ignored when choosing your car and finance plan. Finding the balance between the car you can afford and the car you want can be tricky, but working out your budget beforehand can make this decision easier.
Get your finance pre-approved
Getting your finance pre-approved before choosing a car ensures you know exactly how much you can spend. It’s always hard if you find your dream car but see that it’s just out of your price range. Rather than taking it and hoping that you’ll find a way of making the repayments, why not shop for a car with a finance agreement already in place that you know you can spend? Getting your car finance pre-approved before choosing a vehicle means you can select from cars within your budget. By having a pre-approved finance plan and knowing your exact budget, buying a new car can be less stressful. Make sure your car finance is in place before you begin the exciting search for your new car!