Buying a car can be one of the biggest purchases you make. Whether you buy a brand new car or go for something used, you are normally looking at spending at least a few thousand pounds if you want to get a decent vehicle. When the time does come to make the purchase, you are normally faced with two options – car finance or buying a car outright.
These two options are very different. You may think that buying a car outright is the obvious choice. But car finance has lots of different factors that make it potentially a much more cost effective option.
The biggest positive of car finance is that it allows you to spread the cost of the vehicle over a set amount of time, normally from two to four years. That gives you one big advantage. You can purchase a much more expensive car than you might be able to afford if you were just using money you had saved.
This will give you a much wider range in terms of the vehicle you can afford. It may also open you up to financing a new or nearly new car, something that might be out of your price range entirely if you were relying on savings.
Spreading the cost will also give you a wider range of vehicles to choose from. Not only does that give you more flexibility when you search, but it can also open up cars with newer, more efficient engines and technology. So the running costs of your car will be reduced. Newer cars also tend to be a lot more reliable, so that means less money spent on repairs and servicing.
The big difference between buying a car outright and car finance is that you are charged interest when you buy a car on finance. This interest is for the entire length of the car finance agreement, so you will end up paying more than you would if you were to buy the car outright.
There are ways to reduce the impact of the interest rate though. You can pay a larger deposit at the start, reducing the amount of money you borrow and so the amount you are charged interest on. You can also choose from a wide panel of lenders and finance providers who will have different rates of interest. If you have a good to excellent credit rating, you will find that there are lots of attractive offers which, when combined with the other factors stated in this article, will make buying a car on finance more often.
If you choose a car finance product with a leasing aspect, such as personal contract purchase, then you have the option to return or part exchange your car at the end of the finance agreement. That means you get access to more of the latest models more quickly, taking advantage of improvements in engine efficiency. Newer cars are also less likely to have suffered from as much wear and tear.
If you buy a car outright, you’ll want to get a good amount of use of it before you sell on. Factor in depreciation, especially in new models, and you’ll lose a lot of value. Car finance packages where you can return the vehicle in exchange for a new one somewhat negate this.
There are ways you can get a better car finance deal to make the cost effectiveness even more apparent.
The first is to ensure your credit file is in good condition so that you are provided with an accurate credit rating. Have a look at your file and make sure there aren’t any irregularities or mistakes recorded there. If there are any black marks – defaults or CCJs (county court judgements) – then you can try and work to remove them, e.g. by consolidating any outstanding debts, or by waiting until they leave your file.
You should also use a car finance broker who compares across a wide panel of lenders, not just the big name high street banks. A wider panel of lenders means more options available. Many of the different lenders on the market also cater for different types of customer. Some will work exclusively with those with an excellent credit rating. Others will be more willing to work with those who have a bad or poor credit rating.
As mentioned previously, a bigger deposit is also a great way to improve your finance deal. If you were looking to buy a car outright, you were likely to have a lump sum of some sort saved, so you can use that as your deposit.
If you are curious about car finance, then you can use our car finance calculator to have a look and see what sort of financial package you might be able to afford. All you need to know is your current credit rating, so make sure you have checked with one of the free credit check agencies to get an up to date score.
All you need to do is select which credit rating, the amount you want to borrow and the length of time you want to borrow it for. Make sure to remove any deposit amount you have from the amount borrowed. You can switch between personal contract purchase and hire purchase products to see a quote for the total cost of each type.
If you like what you see, then you can apply and get a more detailed quote from one of our advisors. They will compare finance packages across a wide panel of lenders, so you’ll be given a few to choose from at least.