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7 things to consider to get the best car finance deal

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You’ve decided to take out a car finance agreement – fantastic. Very soon you’ll be able to hit the road in your new set of wheels, but before you jump straight into a finance agreement, it’s wise to do a little research to ensure you fully understand the details of your arrangement.

Don’t worry, you won’t need to spend hours learning the ins and outs of car finance. Instead, we’ve summarised the 7 main factors you should consider before you take out your agreement.

So, if you want to know how to get yourself the right finance to fund your vehicle, take a look at the 7 key elements you should pay particular attention to:

1. Budget

An obvious one but arguably one of the most important. It’s essential you ensure you have an accurate budget in mind before you take out your loan agreement. Fail to budget properly and you may find you’re unable to keep up with your monthly payments, causing you to default on your loan. This can ultimately lead to the car finance company repossessing your car, and you’ll be left with negative credit information on your credit file.

Need help deciding what you can afford on your budget? Then check out our car finance calculator.

2. Interest Rates

An interest rate represents the amount of interest you pay on the money you’ve borrowed. In other words how much the loan has cost you. In car finance the interest rate is often presented as a Flat Rate or an APR (Annual Percentage Rate). So how do they differ?

An APR stands for Annual Percentage Rate and refers to the percentage rate of the interest you pay on your loan each year. The APR also includes any additional charges you have to pay such as any arrangement fees. Therefore, your interest rate could be 11% per annum, but the APR is 14%, as the added charges total an additional 3% interest.

Because APR is calculated annually, the amount of interest you pay reduces depending on the outstanding finance left to pay. And of course, the lower the APR the better, as this means you are paying less interest.

A Flat Rate is always based on the initial amount borrowed at the start of the agreement and unlike APR, a flat rate is not subject to change throughout the period of the loan agreement. This means you’ll still be paying interest on the full amount of the loan in the final year of your agreement, even though most of it the loan has been repaid by this point.

3. Type of Loan

That’s right, there are several different loan options to choose from and choosing the right one can seem daunting. We’ve outlined the most popular loan options we offer at Creditplus below:

PCP – Personal Contract Purchase loan option is the most popular, and generally offers the lowest monthly payments as you only pay the difference between the purchase price and the guaranteed future value (see GMFV) of the car come the end of the loan agreement. At the end of a PCP agreement, you have a choice of three options to settle the agreement. You can either return the car; pay a balloon payment and keep the car; or use the car as a part exchange towards a new car on finance.

LP -  A Lease Purchase requires a balloon payment to be made at the end of the agreement. Unlike with PCP, this payment is not optional, however you will benefit from low monthly repayments and at the end of the agreement the car is yours.

HP- A Hire Purchase agreement works similar to Lease Purchase, however instead of deferring a payment to the end of the contract, it allows you to spread the entire sum of the loan (including the interest) across your monthly payments.

4. Term Length

Term length refers to the length of your credit agreement, which is usually between 2 – 5 years. It’s important you consider the term length carefully, as this is another factor that will impact your monthly repayments. Spreading your payments over a longer period will result in lower monthly payments, however you’ll pay more interest and as a result the total amount you repay will be greater overall.

If you wish to extend your term length or pay the finance agreement earlier, you may be able to do so by contacting your lender.

5. Depreciation

Sadly, like most things is life, cars lose their value over time and new cars in particular are renowned for their quick depreciation rate. So, for loan options like PCP where your monthly repayments cover the depreciation of the vehicle throughout the term length, it’s important you think carefully about how quickly your car is going to depreciate – a brand new car on a PCP loan would not be cost effective!

6. Annual Mileage

Annual mileage is the biggest contributor to the depreciation of a vehicle which is why car finance companies will often set a mileage limit which must not be exceeded. If you do go over your agreed mileage, you’ll likely receive an additional charge to cover the added depreciation of the vehicle. To ensure you’re not caught out by this, it’s worth calculating roughly how many miles you’re likely to accumulate over the term length to avoid agreeing to a limit you can’t stick to.

7. Credit Rating

Finally, you should check your credit score before applying for car finance as this will determine which loan options are available to you. PCP for example, is generally only available to those with a good or excellent credit rating.

Also, knowing your credit rating will help you to calculate your budget, as your credit rating is one of the factors used to calculate your interest rate. The higher your credit score, the lower the interest rate, so if you’re credit score isn’t perfect that’s another incentive to work on it! For tips on how to improve your credit score, check out our earlier post ‘How to improve your credit score - and maintain it’

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