Alongside graduating from school, college or university, starting work and moving out (bye-bye parents, hello freedom), buying a car is a pivotal moment for any young person. However, without the bank of mum and dad, many struggle to afford the lump sum payment, which is why car finance is an attractive and realistic option.
In this short guide, we’ll explain everything you need to know about buying your first car on finance, from improving your credit score and setting budgets to securing the best possible deals. While we’ve tailored this guide mostly to young first-time buyers, the advice given applies to anyone searching for a more affordable way to get on the road.
What is car finance?
Car finance is an accessible means of owning the car of your dreams. Instead of covering the full cost upfront, you can spread payments over several months or years in reasonable, bite-sized chunks.
A personal contract purchase (PCP) is a popular way of financing a car. Agreements often last between three to five years, and at the end you can either make a final payment to keep the vehicle, return it or use the resale value towards buying something brand-new.
You can also opt for Hire Purchase (HP) if you prefer the idea of owning the car at the end of the agreement without needing to pay a final lump sum payment.
To secure a finance agreement, you’ll have to pass a credit check and lender criteria and it helps to make a small deposit upfront (usually 10% of the car’s total cost).
How to improve your credit score
Before lenders consider your application, they’ll undertake a thorough credit check to assess your potential risk. The overall score determines who qualifies for a loan, the amount you can borrow, interest rates and credit limits.
To ensure you’re in the best position possible, you’ll need some active credit history to show you can manage money responsibly (this is especially important for students without full-time employment). Below are three simple ways you can improve your score and bolster your chances of securing finance.
Check you’re on the electoral roll
Lenders check whether you’re on the electoral roll to protect themselves against fraud. If you’re a student, you can register at your home address or student address.
Apply for a credit card and use it sensibly
Using a credit card is the easiest way to show lenders you can keep track of your outgoings. However, if you’re worried about debt or have a low credit rating, a prepaid card is an alternative option, working similarly to a pay-as-you-go mobile capping your spending. Students may also be eligible for a student credit card with a low credit limit.
Mobile phone contract
If you’ve never had credit, a mobile phone contract is a simple way of improving your score. They work much the same as repaying car finance, albeit on a much smaller scale, demonstrating your ability to meet monthly repayments.
Four things to do before buying your first car on finance
Set your budget and plan for additional costs
The most crucial part of buying any car is setting a budget and sticking to it, no matter how tempting a set of shiny new wheels might be. So, before entering a finance agreement, prepare to meet monthly repayments by choosing a realistic model. If possible, negotiate an arrangement that suits your income stream.
However, it’s not just the initial value of the car you must consider – plan for running and maintenance costs too. These include:
- Car insurance (often more expensive for new and young drivers)
- Fuel costs, especially if you plan to travel frequently
- MOT tests, scheduled maintenance and repair costs
- Road tax (there are a few exemptions)
If you’re not sure how much you can borrow, read this handy guide.
Decide whether you want a used or new car
When it comes to buying your first car, a key consideration is whether you should buy new or used. While the decision is ultimately personal, depending on your budget and immediate needs, consider the benefits of both routes before making a final decision.
The advantages of a used car include affordability (the initial price is often between 30-50% less, meaning lower monthly repayments), cheaper insurance (a massive incentive for new drivers who are already facing premiums) and discounted tax.
However, there’s more choice when buying a new car and improved safety features, such as automatic emergency brakes, adaptive cruise control and intelligent sensor systems that reduce collisions. Surprisingly, new models are also quite affordable thanks to the range of generous finance deals on offer.
Find a guarantor
If you’re a student, you’re still eligible to buy a new car on finance. Although, without a full-time income, lenders may need additional reassurance that you can meet monthly repayments. In these cases, a guarantor will help bolster your application.
A guarantor is usually a close friend or relative, with a good credit history, who agrees to continue repayments if you’re unable to make them. While they can’t take on the loan (it will always be in your name), they act as a safety net to mitigate risk.
Entering into a Guarantor Loan is a big responsibility for both parties. It is therefore important that you both understand your obligations, as well as the potential risks.
Double check the agreement before signing
You know how the saying goes – it’s better to be safe than sorry. With that in mind, double-check the terms and conditions of your finance agreement to avoid hidden charges and dubious stipulations.
Things to watch out for include:
- Mileage caps which restrict the amount you can travel each year (exceeding the limit incurs charges anywhere between 3p to 70p per mile)
- Late payment policies which penalise you for missing repayments
- Damage charges and service requirements
- “Free” insurance policies that sound too good to be true
Do you need help finding a finance agreement?
Buying your first car is nerve-wracking at the best of times without worrying about hefty upfront costs, which is why we aim to make the process as straightforward and affordable as possible with the best finance deals anywhere in the UK.
To learn more, call us on 01246 458 810 or drop us an email at firstname.lastname@example.org – one of our friendly specialists will be in touch shortly. For additional information, you can also visit our website where we have hundreds of helpful blogs and articles to browse through.
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Require more help?
Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!