Few of us can afford to buy a car with cash in today’s economic climate, particularly a brand new car, yet owning a car is still essential for most of us.
The RAC say that the cost of buying and running a car works out at an average of £6689 per year. It is a lot of money, particularly when you take into account the fact that the average salary in the UK today is around £25,000 before tax.
Buying a car is often one of the most expensive purchases we make in our lifetimes, second only to a house or apartment. With the typical price for a new small family car ranging from £15,000 to as much as £30,000 or more, it is little wonder that so few of us can afford to buy a car outright. And if you can’t afford to buy it with cash, you are going to have to borrow the money.
Types of Car Finance
Hire-purchase agreements – Hire-purchase agreements can offer good value for money. If you buy your car or motorbike from a car dealer, they are likely to offer you hire-purchase and will arrange it for you, which saves you from having to do very much at all apart from sign on the dotted line. You will usually have to find a deposit, though, which could be around ten per cent or more of the car or bike’s value. Car or bike loans usually have to be paid back over a period of 12 to 60 months, and of course, you will have to pay interest. The APR you will be offered will vary depending on the age of the car. Expect to pay less interest for a new car than for a used car, but remember that new cars lose their value by as much as a third within their first year, so you will still be paying considerably more overall”
PCPs or Personal Contract Plans – Personal contract plans are a good bet if you want a brand new car and low monthly payments. Is this too good to be true? Well, yes and no. Of course, you still have to pay for the car, but you can defer the final large payment until the loan period has ended if you wish. If you do not, you can hand the car back to the dealer or trade it in for a newer model and start the process of paying monthly once again.
Lease purchase – Lease purchase is another form of car finance and very similar to PCP, but it does not give you the option of trading in the car for another model at the end of the loan period. This means that you have to pay the final large payment at the end of the agreement.
Five Common Car Finance Myths
1. You must have a deposit.
Some lenders may prefer you to have a deposit, but it is by no means essential.
2. You must be over 21 to buy a car.
Anyone who is 18 or over may sign a credit agreement. Some lenders do operate an over-21s-only policy, but as long as they can prove they can pay back the money they borrow, most lenders will lend to under 21s.
3. You can’t buy a car if you are on a credit blacklist.
There is no credit blacklist. This is an urban myth and is entirely fictional. All lenders will consider borrowers and measure them against certain criteria. If you are turned down for credit, it is because you do not fit that lender’s criteria, and not because your name is on a mysterious blacklist.
4. You have a low credit score and so won’t be offered car finance.
Whilst all lenders will consider your credit score, many will not base their decision to lend to you only on that score. They will take into account your income and your ability to pay back the loan. They will base your application on its merits, and not on a mistake you made in the past.
5. You can only have finance for one car at a time.
This is another myth. As with many types of credit, you can apply for a number of car loans. If you can prove that you are able to pay them all back, you will have no trouble in being accepted.