Having a good credit score opens so many doors for you in the world of finance. But what about when your circumstances get in the way? You might have missed a monthly mortgage. Or got behind on your phone bill.
The best car finance deals are offered based on your “creditworthiness.” Essentially, the better you are at borrowing, the more likely lenders will be in your favour. Pay your monthly payments on time and in full, and your credit report will be glowing.
Here, we take a look at how to get the best car finance deal regardless of your credit rating:
What is car finance?
Before we get started, you need to understand what car finance is. In the UK, it is the most popular way to purchase a vehicle and can be used on new or used cars respectively. It removes the need to dip into your savings and front cash that most of us don’t have going spare.
Using car finance to buy a vehicle is a credit agreement between you and the lender. They cover the initial cost of the car after you’ve paid a deposit, and then you pay back the total amount, plus interest, over a set period of time.
But, there isn’t just one type of car finance. Here we detail the three most popular ways to finance a car to help you choose the right one for you:
Personal Contract Purchase (PCP)
Perhaps the most flexible car loan of them all, a PCP deal is based on the vehicle’s guaranteed minimum future value (GMFV) – an estimate of how much your car will be worth at the end of your finance agreement.
Your monthly payments are based on the difference between the price of the car and its GMFV. Ultimately, costing less in the long run than other finance deals.
Here, you pay a deposit (typically 10%) and then have low fixed monthly repayments.
During your agreement, the car belongs to the lender or finance company, and your payments only go towards the vehicle’s depreciation.
PCP is ideal for people who like to change and update their vehicles fairly often or want more flexibility at the end of an agreement.
At the end of your contract, you have three options:
- Pay a balloon payment (final lump sum) and keep the car – you will know this amount from the beginning of your contract
- Exchange the vehicle
- Return the car to the supplier
Hire Purchase (HP)
Like PCP, an HP loan requires an initial deposit (usually 10%) followed by fixed monthly payments. Until you make your final payment, you are essentially borrowing the car from the HP company. Once your contract ends and all payments have been made in full, the vehicle is yours.
Leasing
An excellent option for those who want to drive the latest models of cars but without having to own it once your lease is up, leasing is essentially a rental.
When you opt for a leasing deal, there is no option to buy the car at the end of your contract. But, you do get to change the vehicle you’re currently driving every two to three years. It’s a great way to drive cars you typically wouldn’t be able to afford to buy.
However, the initial deposit is usually equal to three months of rental.
How can I improve my credit rating?
We won’t beat around the bush. The best car finance deals are always offered to motorists with a proven track record of paying their agreed payments on time and in full. So if you have a good or excellent credit rating, you won’t struggle to find competitive deals.
But for those of you who have struggled to be accepted for a loan in the past, there are a few things you can do to improve your credit rating.
- Show lenders and creditors that you are in control of your finances! Do this by paying all your monthly payments on time and in full
- Don’t use too much of your credit utilisation (stay below 30% if possible)
- Register for the electoral roll or make sure your current address details are up to date (this also applies if you are living in shared accommodation or with your parents)
- Cancel any unused credit cards but keep old accounts open that show how good you are with your finances
- Don’t apply for too many loans! This will make lenders think that you’re bad at handling your finances and won’t want to take a risk on you!
Alongside the tips above, regularly check your credit file. Anything from a mistyped address to incorrect amounts will single a red flag to your lender as it affects your score. If you spot anything untoward, contact your provider directly, and they will raise any disputes on your behalf.
While you’re there, check for any fraudulent activity on your account. This could be an application you never made or amounts going out of your account that are unknown to you. Speak to your bank directly, and they will help you get to the bottom of it.
Bad credit car finance
Those of you who have maybe missed the odd payment or racked up a default, IVA, CCJ or bankruptcy over recent years may struggle to get their foot in the door. Alongside the ways to improve your credit rating above, you might need extra help to get you back on the finance ladder.
Bad credit car finance is designed by specialist lenders like Carvine who want to get you behind the wheel. Not only will they assess your individual circumstances, but they will work with an extensive panel of providers to ensure you get a workable finance deal that won’t make you spend above your means.
Whether you have bad credit, are self-employed or are a young driver, they will help you through the complete application process to give you the best deals and best chance of getting approved.
Are you ready to find the best finance deal for your circumstances? From finding a car finance deal to keeping your credit file in check, you’ll find your next dream car in no time!
