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The popularity of getting a car through finance has really taken off in the past few years. There are a number of reasons why car finance can be a popular option for drivers. From the higher cost of new and used cars to the cost of living at an all-time high too, it can be harder for drivers to afford to pay for a car in one lump sum. If you’ve never taken out a car loan before, you may be wondering if it’s the right option for you. The article below looks at how car finance works and also the pros and cons to help you decide whether you should finance your next vehicle!
How does financing a car work?
It’s worth noting that there are a few car finance agreements to choose from, but they usually work in the same way as each other. You borrow an amount to cover your car purchase from a finance lender and pay it back over an agreed term in monthly instalments. Your monthly budget will also include any fees and interest to pay too. You can set your finance term to fit in with your affordability and car financing deals can usually be spread over 3-5 years. You can choose the car you want from a participating dealership and payments will be based on the cost price of your chosen vehicle. Depending on the deal you choose, your loan will either be secured or unsecured. A secured loan means the deal is secured against the vehicle and can be taken from you if you fail to stick to the rules of the agreement.
Advantages of choosing car finance:
There are so many benefits to financing a car and for many drivers it can be a no brainer.
- Multiple finance agreements to choose from. Car finance isn’t just one agreement and, in the UK, the most popular ways to finance a car is through hire purchase, personal contract purchase and a personal loan option. You can choose an agreement that’s right for you based on what you want out of your finance deal and also to suit your monthly budget.
- Spread the cost. One of the biggest benefits of getting a car through finance is that you can spread the cost of ownership into affordable monthly repayments that suit your budget.
- Get a newer, better car. When you buy with cash, your budget may be smaller which means you may be limited to the cars you can buy. You can usually get a newer, more reliable car when you spread the cost with finance and pay for it over a term that suits you.
- Fixed payments. The interest rate you pay can fluctuate in line with the Bank of England base rate but once you secure a finance deal, most interest rates and monthly payments are fixed. This means you will pay the same each month for the duration of the loan and it won’t change, unless you refinance your car loan early.
Disadvantages of choosing to finance a car:
It wouldn’t be fair to look at the benefits and not also assess a few factors which may not make car finance the most cost-effective way to get a vehicle.
- Interest to pay on top of your loan. You can benefit from 0% interest car finance deals, but these are usually reserved for brand new cars where the purchase price is higher anyway. You will need to pay interest on your car loan and the interest rate you are offered can massively vary from customer to customer. Choosing a higher interest rate can make car finance less cost-effective.
- Can harm your credit. If you fail to stick to the rules of your credit agreements, it can have a negative impact on your credit. Missed or late car repayments negatively impacts your score and affect your ability to borrow in the future.
- Mileage and damage charges. Certain agreements such as PCP deals require you to set a mileage limit at the start of your deal. If you exceed the annual mileage, there can be additional charges to pay. Some drivers don’t like this as they feel they are restricted by the finance company. You will also have to agree to keep the car in good condition if you want to hand the car back at the end of the deal and you may need to pay for any damage charges too.
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