The majority of people pay bills every month, from utilities to council tax. Generally, as soon as you get paid, at least half your wage disappears. So is it a good idea to start making monthly repayments towards a car finance arrangement too?
Buying a car outright can be a big expense, especially if you’re getting a new vehicle. And even second-hand cars will probably set you back a few thousand pounds. Waiting to purchase a vehicle while you save up the money isn’t always an option - many people need a car to get to and from work. Not to mention the fact that to get a reliable car, you’ll need to save more money, as they tend to be newer, more expensive models.
If you do decide to get a vehicle on finance, monthly instalments are pretty much your only option. But this isn’t necessarily a bad thing - there are a number of benefits to making regular monthly payments towards your new vehicle.
Types of Pay Monthly Car Finance
When it comes to vehicle finance, there are two main options - hire purchase and personal contract purchase. While these are similar in the fact that you will probably need to make a deposit upfront, and then pay monthly instalments, there are some key differences too. We’ve outlined each type of car finance arrangement below:
Hire Purchase (HP)
With a hire purchase agreement, you’re taking out a straightforward secured loan. This means that the loan is secured against collateral - in this case, your vehicle. Secured loans are typically more accessible, even if you have bad credit, though it’s worth bearing in mind that your collateral could be repossessed if you default on the repayments.
You’d make monthly repayments to the lender, and at the end of your contract, you’d own the vehicle. HP can be a more expensive option than PCP, but you will be buying the car, rather than paying for the depreciation.
Personal Contract Purchase (PCP)
PCP deals are slightly more complicated than HP - the value of your car will be worth at the end of the agreement is estimated, and you’ll pay the difference between that figure, and the sale price. This is known as the depreciation of the vehicle. Then when your contract ends, you can decide whether to hand back the keys, enter into a new agreement, or make a balloon payment.
A balloon payment is the figure originally given, estimating how much the car would be worth when your term finished. If you decide to pay this, you’ll then own the car outright. The great thing about PCP arrangements is that you have a lot of flexibility - you can choose how you want to proceed. A personal contract purchase deal also generally comes with lower monthly repayments than HP loans.
Advantages of Vehicle Finance
Paying for your car loan each month, rather than buying it outright, does come with several benefits. So if you’re considering purchasing a vehicle on finance, it’s good to know about how this can positively impact you - both in terms of your finances, and your credit rating. We’ve explored the top three advantages of monthly car financing below:
Spread the Cost
The first benefit is an obvious one - vehicle finance allows you to spread the cost of repayment. Purchasing your car by paying a lump sum may limit your options as to what you can afford, but with car finance, you can choose from a huge range of makes and models.
Taking out a car loan also means that you can easily budget for the payments. Most vehicle finance options have fixed interest rates, so you’ll be paying the same amount each month. And if you set these instalments up as a standing order, they’ll be just like all your other regular expenses - you won’t even have to think about them!
Improve Your Credit Score
It may sound a little strange, but taking out loans can actually help boost your credit score. Many people assume that being completely debt free is the best way to improve your credit rating, but this isn’t always the case. You need to demonstrate to lenders that you’re able to manage your money well, and the best way to do that is to borrow money and repay it on time.
Your credit score is calculated from information on your credit file, which contains details about your loan history. This could include anything from short term loans to a mortgage. So if you’ve never borrowed before, lenders have no way of knowing your creditworthiness, which can damage your credit rating.
Essentially, buying a car outright can be the cheapest option, as there won’t be any interest to pay, but may not be the best thing for your credit score.
Low Interest Rates
Taking out a car on finance doesn't have to be expensive. There are all sorts of loan options available, and you should be able to find a deal that suits your budget. You may even be able to find a 0% APR vehicle loan.
If you can’t find the cheapest interest rates on car finance, this could be because you have a bad credit history. So before making an application, it’s a good idea to see if you’re able to boost your credit rating. You can easily do this by signing up with Experian - they’ll use other information, in addition to the details on your credit file, to show that you’re able to keep to regular repayments. This could include things like Netflix or Amazon subscriptions. Once you’ve increased your credit score, you may find that you’re eligible for low APR loans.
Limitations of Vehicle Finance
While there are a number of benefits to taking out a car on finance, you do also need to consider the disadvantages. The main risk of a car loan is that, because it’s a type of secured finance, if you’re unable to keep to the repayments, the lender has the option of repossessing the vehicle.
Failure to make the agreed payments could also have a negative impact on your credit rating, which in turn can affect your ability to take out finance in the future. This is why it’s important to check whether you’re able to comfortably afford the instalments before applying for vehicle finance. You can get a rough idea of your monthly payments by using our car finance calculator.
And if you’d like to know more about vehicle finance in general, you can chat with our expert team! Get in touch today to discuss your car finance requirements.