When it comes to getting a car on finance, you may be wondering how much it is going to cost you. Car finance isn’t a one size fits all agreement and there are even different types of agreements to choose from! The guide below looks to explore how much car finance could cost you and the different factors which can affect your payments.
What is car finance?
The UK car finance industry has become increasingly popular in the past few years and it’s easy to see why. Car finance allows you to spread the cost of getting a better car than you would with cash and make affordable monthly repayments. Car finance is when a lender gives you money to pay for your chosen car. You then pay the lender back in monthly payments over an agreed term. Car finance agreements can last anywhere between 1-5 years. You will usually pay interest within your monthly payments unless you have opted for a 0% interest deal. Finance can be provided on both new and used cars and you can select a car finance agreement that’s right for you.
Types of car finance
In the UK, there are three main types of car finance which tend to be the most popular. How much your car finance deal costs can depend on the type of agreement you choose. For example, personal contract purchase deals tend to have lower monthly payments than other options. This is due to the large balloon payment at the end of the deal if you want to own the car. Hire purchase tends to have higher monthly payments as unlike PCP, you spread the whole cost of your chosen car. This can be really straightforward if you essentially want to hire a car through the term and then pay the small option to purchase fee and the car is yours to own. Personal loans can benefit from low interest rates which help you to save money in the long run. It’s worth exploring each before you commit to getting a car.
One of the biggest factors that can affect your car finance payments is the loan amount. The loan amount is essentially the value of the car. For example, getting a brand-new car for £20,000 will cost you a lot more than getting a used car worth £5,000. If you want to keep costs low, it’s worth considering a used car over a new car as the purchase price will usually always be lower than a new car.
Most car finance agreements will require you to pay interest on top of your loan amount. Your interest rate offered reflects the cost of borrowing and can determine how much you back overall. The lower the interest rate, the better and some new cars can benefit from 0% interest. Your interest rate can be determined by a few factors such as your credit score, deposit, loan amount and more. When you’re looking at car finance cost, don’t just focus on the monthly repayment. You may have found a deal that is the cheapest monthly, but you may be charged higher interest which means you’ll pay back more money overall.
When you consider how much car finance costs, you should also look at how much you can out down for your car finance agreement. A larger deposit reduces the loan amount and can bring your costs down. Having a deposit to hand can also help to help you secure finance as it shows more financial stability to the lender. If you don’t have a deposit to hand, that’s ok too but you could be paying more than you need to.
Your credit score is important when it comes to getting a car on finance. Lenders want to see what type of borrower you have been in the past and the likelihood of paying your finance back on time and in full. Having a history of missed or late payments can negatively impact your credit score and make you more of a risk to lend to. In this case, finance lenders could set higher interest rates to help secure the agreement. Low interest rates are usually reserved for those with better credit scores. If you want to keep costs low, you could consider increasing your credit score before applying for car finance.