Purchasing a car is a significant financial decision, and for many in the UK, car finance is the most practical way to afford the vehicle they want.
However, before jumping into an application, it’s crucial to be well-prepared. This not only increases your chances of approval but also ensures that the car finance plan you choose aligns with your financial situation and future goals.
In this guide, we’ll take an in-depth look at the key steps to get ready for applying for car finance, from checking your credit score to choosing the right type of finance for your needs.
1. Understanding your financial situation
Before applying for car finance, it’s essential to have a clear picture of your financial health. This means assessing your current income, savings, existing financial commitments, and any future expenses you might anticipate.
Most lenders will take a deep dive into your finances, so it’s best to know exactly where you stand.
- Income and expenditure: Start by listing your monthly income and deducting your fixed expenses such as rent, utilities, groceries, and existing debts. This will help you determine how much you can afford to spend on car finance repayments without stretching your budget too thin.
- Disposable income: Lenders typically look at your disposable income (the amount left after your essential expenses) to see if you can comfortably afford monthly repayments. Ideally, your car finance payment should not exceed 20-30% of your disposable income.
- Emergency savings: Having some emergency savings can also work in your favour as it shows lenders that you’re financially secure. If possible, ensure that you have at least three to six months’ worth of living expenses saved before taking on new debt.
2. Check your credit score
Your credit score plays a pivotal role in determining whether you’ll be approved for car finance, as well as the interest rate you’re likely to be offered. Lenders use this score to assess how reliable you are when it comes to repaying borrowed money.
- How to check your credit score: In the UK, you can check your credit score for free through agencies like Experian, Equifax, or TransUnion. Make sure you review your credit report for any errors or outdated information that could negatively impact your score. If you find discrepancies, report them to the credit agency to have them corrected.
- Improving your credit score: If your credit score is less than ideal, take steps to improve it before applying for car finance. Paying down existing debt, making timely payments on bills, and keeping your credit utilisation ratio low (ideally below 30%) can all contribute to boosting your score over time. Even small improvements can make a big difference when it comes to the interest rate you’ll be offered.
🚗 Read more: How to boost your credit score.
3. Gather required documentation
When applying for car finance, lenders will require several documents to assess your eligibility. Having these documents ready in advance can streamline the application process and avoid unnecessary delays.
- Proof of Identity: You’ll need to provide a valid form of identification, such as a passport or driving licence.
- Proof of Income: Lenders typically ask for payslips from the last three months or, if you’re self-employed, recent tax returns or bank statements that show your earnings.
- Address Verification: A recent utility bill or bank statement can be used to verify your current address.
- Bank Statements: Some lenders may request bank statements to assess your financial habits and see how well you manage your income and outgoings.
Being prepared with these documents demonstrates responsibility and can help ensure your application moves through the process quickly.
4. Decide on a budget for the car
Once you have a clear understanding of your finances and credit score, it’s time to decide on a budget for your car purchase. This budget should consider not only the cost of the vehicle but also other associated expenses such as insurance, road tax, fuel, maintenance, and repairs.
- Monthly repayment affordability: When setting your budget, be realistic about what you can afford to pay each month. Use online car finance calculators to get an idea of how much you’d need to repay based on different loan amounts and interest rates.
- Deposit considerations: While some car finance deals offer no deposit options, paying a larger upfront deposit can reduce the amount you need to borrow and lower your monthly repayments. It also shows lenders that you’re serious about the commitment and are less likely to default on the loan.
5. Choosing the right type of car finance
There are several types of car finance available in the UK, and choosing the right one can make a big difference in terms of affordability and flexibility. The main options include Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Loans.
- Hire Purchase (HP): HP involves paying off the cost of the car in instalments over an agreed period. You’ll usually need to pay a deposit at the start, followed by monthly payments. Once you’ve made the final payment, the car becomes yours. HP is ideal if you want to own the car at the end of the agreement.
- Personal Contract Purchase (PCP): PCP is similar to HP, but with lower monthly payments because you’re only paying off the depreciation of the car, not the full value. At the end of the contract, you can either return the car, make a balloon payment to own it, or trade it in for a new vehicle on another PCP deal. PCP is a good choice if you prefer flexibility and tend to change cars frequently.
- Personal Loan: A personal loan from your bank or another lender can also be used to finance a car. With this option, you borrow the money upfront and pay for the car in full. You then repay the loan in monthly instalments. Personal loans often have lower interest rates than HP or PCP, but they require a good credit score to get the best deals.
6. Shop around for the best deal
Not all car finance deals are created equal, so it’s important to shop around to find the best terms for your needs. Lenders offer different interest rates, fees, and repayment terms, so comparing options can help you save money in the long run.
- Check multiple lenders: Look beyond just the dealer’s finance offer. Banks, online finance companies, and credit unions all offer car finance options, and some may provide better terms than others.
- Consider pre-approval: If you’re concerned about damaging your credit score with too many applications, consider getting pre-approved for car finance. Many lenders offer a soft credit check, which won’t affect your credit score but will give you an idea of how much you can borrow and what interest rate you’ll be offered.
7. Understand the terms and conditions
Car finance agreements can be complex, so make sure you understand the terms and conditions before signing anything. This includes the interest rate (APR), repayment schedule, fees, and any penalties for early repayment or missed payments.
- APR vs Flat Rate: It’s essential to look at the APR (annual percentage rate) rather than the flat interest rate, as the APR includes other fees and gives a more accurate picture of the total cost of the loan.
- Early Repayment Fees: If you plan to pay off your car finance early, check whether there are any early repayment penalties. Some lenders charge a fee for settling your loan before the agreed term ends.
- Mileage Limits: For PCP agreements, be aware of mileage restrictions. Exceeding the agreed mileage can result in additional charges when you return the car at the end of the contract.
8. Get a vehicle history check
If you’re buying a used car, it’s essential to get a vehicle history check before committing to finance. A history check will reveal any potential red flags such as outstanding finance on the car, previous accidents, or if it has been reported stolen.
9. Consider additional costs
Beyond the purchase price and finance repayments, there are several other costs associated with car ownership that you should factor into your budget.
- Insurance: Car insurance premiums can vary widely depending on the make and model of the car, your age, driving history, and location. Get insurance quotes before committing to a specific vehicle to ensure it fits within your budget.
- Road Tax and MOT: Be aware of the ongoing costs of road tax and, if you’re buying a used car over three years old, the annual MOT test.
- Maintenance and Repairs: Even with a warranty, cars require regular maintenance. Budget for routine services as well as unexpected repairs.
Ready to get in the driver’s seat?
By carefully considering all the points mentioned above, you’ll be in a much stronger position to apply for car finance and secure the best deal. Taking the time to prepare not only increases your chances of approval but also ensures that the finance agreement you choose is affordable and fits with your long-term financial plans.
