When buying your first vehicle, you may not be able to afford a particularly modern car if you’re purchasing it outright. Some people therefore ask themselves ‘should I get my first car on finance?’ This is a difficult question to answer, as everybody’s circumstances will be different. But as to whether you’re able to get your first car on finance - it’s probably not as impossible as you’d think! We’ve explored this topic in more detail below.
Car Finance and Your Credit Score
One of the things that can make car finance difficult to obtain is your credit history. And for younger drivers, this will often be due to their lack of credit history. If you’ve not taken out much credit in the past, this will mean you don’t have much of a credit footprint. Lenders therefore can’t see how you manage your money, and may be reluctant to lend to you.
In these situations, you may need to borrow in order to take out further credit. Essentially, you need to demonstrate that you’re capable of budgeting and repaying on time. Of course, this sounds like a bit of a Catch-22 - how can you borrow money if lenders need you to have a proven track record of repayment?
What you might be surprised to learn is that things like your mobile phone bill are recorded on your credit file. So if you’re paying this each month, that can help boost your credit rating, and lenders may be more likely to lend to you.
If you are thinking about taking out car finance, it can be a good idea to check your credit score first, and then use a car finance calculator to see what sort of repayments you’d be making. You can check your credit rating for free using sites like Experian and Credit Karma.
Why Get Your First Car on Finance?
Getting a car on finance, especially online, is becoming an increasingly popular option in the UK. There are a number of benefits to taking out a vehicle loan, and we’ve looked at the top three advantages below:
1. Newer, More Reliable Models
Buying a car, whether it’s new or second-hand, can be a big financial commitment. And if you need to pay the whole cost upfront, your options may be rather limited. But with car finance, you can make monthly instalments, and therefore opt for a more expensive model. Newer cars also tend to be more reliable, as they’ve got less miles on the clock, and probably won’t need as many repairs or replacements.
2. Spread the Cost
As mentioned above, getting a vehicle on finance allows you to spread the cost. So rather than saving up for years to buy your dream car, you can cover the expense over the same time period, but have access to the car straight away. And because the monthly instalments will typically be fixed, these payments should be easy to budget for.
Not only this, but after making the initial deposit, you can also hang on to any additional savings you have. You don’t need to spend all your money in one go, but can keep some in reserve for a rainy day!
3. Build Your Credit Score
Another great thing about taking out just about any form of credit is that it can help improve your credit score. As long as you’re confident that you’re able to afford the repayments, and make them on time, this should show that you’re responsible with your money and help build your credit rating. And when you’re applying for other forms of credit, from personal loans to mortgages, your chances of approval should be increased.
Limitations of Car Finance
While there are benefits to vehicle finance, there are also limitations. For instance, although a car loan allows you to spread the cost of repayment, you will also be paying interest. This can add up over time, meaning you pay back hundreds of pounds of interest overall. However, if you’re able to get a low interest rate, you can keep these costs down. The best way to ensure you’re offered the cheapest interest rates is to improve your credit score.
Another reason to carefully consider vehicle finance is the risk of repossession. As car finance is a type of secured loan, the vehicle acts as collateral against the value of the loan. So if you were to default on the repayments, the lender has the option of repossessing your car. The key to avoiding this from happening is to enter a car finance agreement with monthly repayments you can comfortably afford.
First Car Finance Options
If you do decide to get your first car on finance, there are a number of different options available. With our panel of lenders, you can choose between Hire Purchase (HP) and Personal Contract Purchase (PCP), depending on your preference and budget.
HP is just like any other form of loan, in that you borrow the money and pay it back, along with interest, over a set time period. But with PCP, you’re covering the cost of depreciation instead, which is how much the vehicle goes down in value between the point of purchase and the end of the agreement. You can then choose whether to buy the car by making a balloon payment, entering into a new contract, or walking away entirely.
And if you’re worried about your credit score, there are specialist lenders who offer car loans for bad credit. Guarantor car finance can also be a good option for people with a less than perfect credit score. Having a guarantor reduces the risk for the lender, so they may be more likely to accept your application, and could offer you lower interest rates.
Whichever type of vehicle finance you opt for, Wheelie Good Finance are here to help! We’ll do our best to find a suitable lender for you, so you can purchase your first set of wheels!