How Cost Effective Is Car Finance?

For many drivers, spreading the cost with car finance is the only way they would be able to afford a vehicle. Buying a car with cash can be a smart choice but for many, it’s unrealistic to be able to afford one lump sum payment for a car. If you’ve decided car finance is the route you want to go down, it can be a good idea to assess whether it’s the right choice for your situation and delve into how cost-effective car finance actually is.

Cash is king

Before we jump into the world of car finance, it’s worth remembering the most cost-effective way to get a car is to buy with cash. Cash is king because you will be the legal owner of the car, there’s no monthly payments or interest to pay and you can modify or sell the car when you want. Buying with cash also gives you the freedom to buy from a private seller or a car dealership and could make it easier to haggle the advertised price.

High interest rates

Car finance with a high interest rate may make your deal more expensive than it needs to be. It can be hard to get a 0% interest deal from a trusted car finance company but could be possible with a brand-new car purchase. If not, you will usually need to pay some sort of interest. Interest can be included within your monthly payments and a higher interest rate will make the deal more expensive. Factors like a better credit score, a shorter loan term and a higher deposit contribution can all help to lower your car finance interest rate.

Your credit matters

A bad credit score can make car finance more expensive because it can increase the interest rate you are offered. A very bad credit score could also see you be refused car finance if the lenders decides you aren’t likely to make your payments on time. If you’re wanting to get the best finance deal possible, it can be a good idea to increase your credit score first, if you need to do so. It can be harder to get approved with a low credit score because it doesn’t fill the lender with much trust. If your low score is due to missed or late repayments, lenders will assume you’re going to repeat this behavior again.

Compare loans

Jumping at the first car finance deal you’re offered isn’t the way to get the best deal. If you’re applying for finance through a car dealership, you may be limited to a small number of lenders on their panel. More drivers are now using the finance first approach and letting a car finance broker sort their finance for them. Brokers work on behalf of the customer and usually have several trusted car finance lenders on their panel. They help you to find the best and lowest rate finance for your situation from the lenders on offer. A car finance broker is usually free to use and instead charge the lender commission if you decide to take up finance with them. However, it’s always worth checking if the charge any fees before you commit.

You may not own the car

Depending on which type of car finance you choose, you may not own the car throughout the agreement. This means you’ll be paying off your finance each month but with no physical asset to show for it. When you buy with cash, you’ll be the legal owner of the car straight away, and you can sell the car whenever you want. Car finance deals such as Personal Contract Purchase and Hire Purchase are secured loans which means the lender owns the car throughout the agreement and if you fail to make your repayments, the lender has the right to take the car away from you.

Explore personal loans

If you know car finance is the right route for you, you should first look into a personal loan. Out of the car finance agreements on offer, personal loans tend to be the most cost-effective. Personal loans aren’t secured against the vehicle and instead can be used to buy anything you want. You would ask the lender to send you a certain amount of money and if approved it will get deposited into your bank account. You can then shop for cars within your budget just like a cash buyer!



Personal Finance

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I'm Jethro. I'm a carpenter, and love to build things! You can find me in the garage or at work most days of the week.My sister is Crystal, who you might know from this very blog. Her son Johnny loves video games just as much as I do - so we have a lot of fun playing together!

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