Preparing for car finance

How to prepare for car finance

Are you ready for a new car? If you’re already dreaming about getting behind the wheel of something new, you’ll probably be considering car finance.

But what can you do to prepare before making an application? And which steps can you take to give yourself the best chance of being approved?

Read on to find out more about preparing for car finance:

Start saving for a deposit

While no deposit car finance options are available, the more money you’re able to put down upfront, the less you’ll need to borrow. There are a few advantages to having a large deposit when financing a car; by borrowing less you could get lower monthly repayments or a shorter loan term, you might decrease your chances of ending up in negative equity, and, if you have bad credit, it could help you find an approval.

Typically, the more money you want to borrow, the higher the perceived risk to the lender, which can make it more difficult to secure a loan if you’ve missed payments in the past or had a CCJ. Even so, it’s important that you don’t drain your savings to build up a deposit. Make sure you have enough left over to cover costs like your MOT, service, fuel, insurance, and any unexpected repairs.

If you’re concerned about negative equity, putting down a smaller deposit means you’ll have to increase your loan to value percentage. Depending on the rate of depreciation – how quickly your car loses value – you could end up owing more on your loan than the car is worth. But if you’re looking for a PCP finance agreement and there’s a risk of negative equity, a large deposit might not be the best option. You may need those savings to cover the balloon payment if you want to own the car when your loan term ends or to use as a deposit in a new deal.

Check your credit report

When applying for car finance, your credit score is one of the most important factors that’s taken into consideration. Your score is designed to reflect how you act financially but it’s not fixed, and you can take steps to improve it over time. Each of the UK’s three main credit reference agencies uses different information and different formulas to calculate your score so it’s important to check all three to find out how your credit score measures up. And you can check your score for free – just head to ClearScore, Experian, and CreditKarma to find out more. 

Take steps to improve your credit score

So, you’ve taken time to check your credit score with each of the three credit reference agencies and it looks like it could do with some work. Don’t panic, you’re not the only one, almost everyone could be taking steps to improve their credit history. There are many different things that can impact your score including how many times you’ve applied for credit in the past, how much credit you’re currently using, your address history, and your payment history. And you might be surprised by how much small changes could make a big difference when looking for finance on a car.

Here are a few quick and easy steps you can take to boost your score:

• Register on the electoral roll
  Getting on the electoral roll is one of the most straightforward ways you can improve your credit and it should be on your to do list every time you move house. You can register online, and it takes just a few minutes.
  
  
• Pay bills on time
  While it’s not always easy to keep up with your bills, especially if you’re self-employed or have an uncertain income, making payments on schedule can help you maintain your score. Try setting up direct debits straight after payday if you’re the forgetful type.

• Check for mistakes on your credit report
  Once you’ve got into the habit of checking your credit report regularly, you’ll be able to spot mistakes. It could be a missed payment that you’re sure you made on time or a wrong letter in the postcode of your past address. If you do find an error, be sure to raise it with the relevant credit reference agency.
  
  
• Use a smaller percentage of your available credit
  This is one of the reasons why closing credit cards you don’t use often isn’t necessarily a good way to build credit. When you have credit available to you that you’re not actively using, you demonstrate that you’re a responsible borrower. In contrast, maxing out your credit cards every month could make lenders worry that you’re already spending more than you can afford.

Understand your car finance options

When preparing for car finance, you might be surprised by the number of different types of loan on offer. Take time to decide which type of car finance is right for you. This could depend on your individual circumstances, how much you want to borrow, the type of car you’re looking for, and how you want to use it.

Here at CarFinance 247, we work with lenders that can offer both HP and PCP car finance.

Hire Purchase

Hire Purchase or HP car finance is one of the most popular car finance options available. It’s a fixed interest loan that lets you break down the cost of a new car into affordable monthly payments. Once you’ve finished making all the repayments, including the ‘Option to Purchase’ fee, you’ll own the car. You’re unlikely to face mileage restrictions with car finance HP but monthly payments might be higher than they would be with other types of loan.

Personal Contract Purchase

Personal Contract Purchase – known as PCP car finance, for short – gives you options at the end of your agreement. With this type of car finance agreement, you monthly repayments will normally be lower than they would be with HP, but you might have to agree to mileage restrictions and avoid damaging the car to swerve any penalties. At the end of the loan term, you can choose to hand the car back, buy it by paying the final one-off balloon payment, or use any positive equity left in the vehicle as a deposit in a new deal.

Personal Loan

Unlike car finance PCP, with a personal loan, you’ll usually receive a lump sum that you can then use to purchase a car. You can then pay the loan back in monthly instalments and there’s no deposit needed. The biggest difference with this type of car finance is that you’ll own the car as soon as you pay the seller. Assuming you keep up with your repayments, you can do whatever you like with the car: drive long distances, modify it, or even sell it!

Personal Contract Hire

If car ownership isn’t for you then personal contract hire or PCH might be worth considering. Sometimes known as leasing, PCH is a long-term rental agreement that usually lasts between two and four years. You’ll pay fixed monthly payments for as long as your agreement lasts and then hand the car back. Keep in mind that you will probably have to pay extra if you exceed the agreed mileage or damage the vehicle.

Create a car wish list

The more precise you can be with your car wish list, the more likely it is that you’ll be able to find the right model for you. Be sure to think about whether the things you want now will still be practical in a year or two; a car purchase is a big commitment and there’s no point buying a sporty two-seater convertible when you’re planning to expand your family next year.

Make a list of the things you need from a car as well as the things that you want and rank them in priority order. You might have to make compromises on smaller things like the car’s colour or the size of its touchscreen display, but you shouldn’t have to try to make it work with a car hasn’t got enough space for all your shopping bags and needs filling up with more fuel every other day.

Use your list to help inform your online research. If reliability is a priority, for example, you’ll probably want to check out the manufacturer’s reputation and look up safety test scores.

Find out how much your car is worth

Are you considering a part-exchange? If you already own a car, you could use its value as a deposit in a new car finance deal and reduce the amount you need to borrow. It’s important that you find out how much your car’s currently worth as, due to depreciation, it’ll probably have lost some of its value since you first bought it.

You should be able to get a good idea of its worth online. Glass’s Guide is one of the most respected names in the used car industry and can let you know the average value for a car of your make and model. You can also look at similar vehicles on used car listings like WhatCar and AutoTrader.

Remember though that online valuation services can only give you an approximate value based on the make, model, and age of your vehicle. There are many things that can affect the individual value of your car – including its condition – and it’ll need to be assessed by a dealership to get a final figure.

Set your budget

Figuring out your budget might not sound as fun as finding your dream car but it’s an important part of the car finance process. Knowing how much you can comfortably afford to spend before applying for car finance can make it much easier when the time does come to choose a car.

Think about how much you’d be happy borrowing overall and how much you can afford to pay back each month. Think about your personal priorities too; if lower monthly repayments are more important to you than owning a car at the end of your agreement that PCP car finance might be the best option for you.

Make sure to factor in the everyday costs associated with owning a car. An annual MOT, service, tax, fuel costs, and maintenance should all be included in your initial budget.

Prepare your paperwork

Different lenders might ask for different documents but there are a few documents that it’s worth taking the time to dig out of your drawer before making an application. You’ll need easy access to your driving licence – whether full or provisional – as well as another form of ID like your passport. Proof of address can come from a utility bill or bank statement from the last three months’ and you can use payslips to prove your income.

Don’t worry if the admin sounds overwhelming, you can upload most of your documents digitally through our app and your dedicated account manager will be on hand to help you submit the right paperwork.

Get a quote

When you’re ready to take the next step towards financing a car, it’s time to get a quote. When you look for a loan with us at CarFinance 247, you can apply online and receive a decision in minutes. We'll run a soft credit check to see if we can find you an approval from one of the lenders on our panel. We’ll always look to find you the best deal from our panel of lenders and there’s no obligation to proceed.

You’ll also be paired with a dedicated account manager. Think of them as your car finance concierge. They’ll be in your corner throughout the process; they can answer any questions you might have, help you find a car, sort all the admin, and even negotiate with the dealership on your behalf!