Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
30th November 2020
3 minute read
New cars aren’t cheap, but most of us rely on our four wheels for day-to-day life. Maybe you need a bigger car as your family grows, or your current car is getting a little bit long in the tooth. Perhaps you just fancy treating yourself, or have a metallic purple beach buggy in mind – sometimes you just need to go car shopping.
If you find yourself needing to invest in a motor this year, a personal loan in the shape of a car loan might be the vehicle to your success.
To make it easier to find the right car finance for you, here are the key things you need to consider.
What is a Car Loan?
Buying a new car is mega exciting, but also a big financial commitment. Most loans can be arranged quickly and easily, so you can buy a car even if you don’t have a deposit, which you’ll need for some other car finance options.
Car loans: a summary
- Spread cost over monthly payments
- Unsecured loan
- Higher interest rates
A car loan is usually an unsecured personal loan with a fixed interest rate. This means that your interest rate is agreed at the start of the loan and doesn’t alter during the time you’re paying the money back. Having fixed monthly payments can make it easier to budget for things like petrol or car insurance.
For those with a very poor credit rating, an unsecured car loan may not be an option. You’ll find more info on secured loans here, but the thing to remember is that they usually use your home as collateral, which isn’t a risk to take lightly.
Compare Car Loans
If you’re looking for a new set of wheels, comparing car loans could help you avoid a hefty financial pile-up in the future.
Comparing annual percentage rates (APRs) is a good place to start, along with monthly repayment information. Don’t forget that the headline rate isn’t available for everyone. Just 51% of people accepted for a loan will get the attractive rate advertised. APRs are part of a bigger picture. You should also look at other factors that may bump up the total cost of the loan such as arrangement fees. Take note of the finer details too, such as whether the company offers instant decisions or ‘soft search’ facilities that won’t affect your credit score.
Interest Rates on Car Loans
Generally speaking, the more you borrow, the lower the interest rates available tend to be. You’re also likely to pay larger amounts back over a longer time period. Paying less a month can seem like a good idea when you’re excited to get out on the road, but remember, that could mean you end up paying more interest in the long run. Aim to pay a loan back as quickly as you can while keeping your payments affordable.
Being super frugal just so you can buy a top of the range vehicle may lose its novelty once you’re struggling to put petrol in it. This is always worth bearing in mind when you’re choosing a car. If you’ve set your sights on a top of the range sports car, work out what monthly payments you can afford and let your budget steer what you buy.
Never borrow more than you can afford to pay back and don’t be tempted to lend more than you need, unless it’s a marginal amount that gives you access to a cheaper overall loan. If you need to borrow £4,900 to top up your savings to buy a car, you may actually find you’re better off borrowing £5,000, as doing so could help you secure a lower interest rate. This may not always be the case however, so it is important to do some research before you apply. As a general rule of thumb, you should only borrow the amount you need and not a penny more.
Is a Car Loan Right for Me?
Unlike other forms of car financing, with a car loan you own the car from the outset. This means you don’t need to save a deposit, though if you have one it could help you get the wheels of your dreams more easily. Another benefit is that, should you run into financial problems, you’d be able to legally sell the car. In this case, you would of course still be liable to pay back the loan.
Other Ways to Buy a Car
Other ways of buying cars may be available through your car dealership. These tend to work on a hire purchase or a personal contract plan (PCP) basis. This means you don’t own the car until you make the final payment.
In the case of the PCP you need to either hand the car back or make a balloon payment to cover the resale value of the car in order to keep it. There can be other stipulations too, like keeping under a certain mileage and in good condition in order to be able to hand it back. So, if you are considering offers at your local garage, ensure you have any offers of car finance explained fully. This should include whether your interest rate is fixed against the initial cost of the car, or your remaining balance.
If you’re wondering ‘where can I get a car loan?’, the choices are endless. The Money Guru makes it easy for you by comparing car loan deals.