How to drive off with the best car loan

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NS

Buying a car after home is one of the biggest purchases of your life. But, unless you have a pile of spare cash, you’ll probably need to borrow money to fund it. We take a look at the different options.

What is the cost of a car now?

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The cost of used cars has been rising steadily since the pandemic, registering a monthly growth of 25.6% in October 2021, according to the latest data from Autotrader, which beats the average cost of a used car (across all fuel types). Keeps one. A staggering £16,878.

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Rising prices have been fueled by a combination of reduced supply and increased demand – especially for expensive EV vehicles following the recent fuel crisis.

Overlaying broad market conditions are, of course, traditional pricing factors; Brand, make and model, with additional features such as additional trim, in-car ‘infotainment’ and parking sensors.

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How can I raise cash?

You have a variety of finance options when it comes to buying a car. If you are buying from a dealership, chances are that you will be flooded with options ranging from Hire Purchase (HP) to Personal Contract Purchase (PCP).

But if you need to borrow money, one of the easiest and most popular options is a personal loan. It can also be an inexpensive way to borrow over a certain time period, depending on your credit history, and provided your payments are manageable.

What is Personal Loan?

A personal loan in an unsecured loan, which means that the money you have borrowed is not secured against an asset. Therefore, if you fail to continue making payments, the lender will not take possession of your car or your home.

While taking a personal loan, you borrow money and pay it back in a stipulated time frame with fixed monthly repayment. You pay off the loan with interest, but receive a cash advance.

Be aware that if you lag behind in repayments or don’t repay the loan, you will face penalty charges, a tarnished credit history and could be pursued by a debt collector.

How much can I borrow?

You can usually borrow between £1,000 and £25,000 as a personal loan for tenors of one to five years, although larger loans and longer terms are available. You can reduce your monthly payment by choosing a longer tenure. But remember, the longer you take to pay off the loan, the more interest you will eventually have to pay.

How much will I pay in interest?

The interest rate you’re offered will depend on your personal financial history, or credit record, term and how much you borrow. Keep in mind that the ‘representative’ annual percentage rate (APR) is usually only offered to 51% of loan applicants. Before deciding on the rate and deal the lender offers, they do an eligibility check on your financial history.

Currently, the cheapest loan rates cost around 2.8% if you are borrowing between £7,500 and £25,000, provided you have a clean credit history. And on loans between £3,000 and £5,000, rates go up to around 8.3%.

How do I get a personal loan?

Check out a comparison service to find a range of potential deals from a variety of lenders. Simply plug in your basic personal details along with how much you want to borrow, for what, and tenure.

Once you have gone through the application process, the money will be sent to your bank, so that you can pay for the car directly and start paying off the loan. Approval of the loan can take anywhere from a few hours to several days.

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What are the benefits of personal loan?

  • Once you use the loan to pay off the car, you will be the full owner of the car. Some other forms of finance are like a rental agreement, and require you to hand the car back.
  • If you have a good or excellent credit rating, personal loans are usually cheaper than the financial packages offered by car dealerships.
  • You can choose to buy a car privately, or take a personal loan through a dealer – so you are likely to have the best choice of cars.
  • They are an easy way to borrow a large amount, provided you meet the lender’s eligibility criteria.
  • Loans are flexible as they are offered in different tenors ranging from one to 10 years. However, the longer this period, the more interest you will pay overall.

What are the disadvantages of personal loan?

  • Personal loans are usually limited to £25,000, leaving a shortfall if you are buying a new or top-end car.
  • Your payment may be higher than some types of finance, such as a lease arrangement where you effectively rent the car over a few years.
  • You will be responsible for the maintenance and all repairs of the car as you are the owner when you use it to pay off the loan.
  • If you change cars frequently, you will have to sell it and buy a new car when the time comes. Other forms of finance may be more appropriate in this scenario.

What are the other options?

There are a variety of finance deals on offer when you are buying a new car. Here are some other ways to raise cash:

0% credit card

You pay no interest, but you may struggle to get a credit limit large enough to buy a car, depending on what you want.

Personal Contract Purchase (PCP)

You take out a loan but at the end of the deal you will not pay the full value of the car or own the car. You either keep the car, hand over the car, or part-exchange for another car by paying the remaining lump sum at the end of the deal.

Hire Purchase (HP)

You pay the deposit amount and pay the cost of the car in monthly installments. However, you will not have the car until you have made the final payment.

Car Leasing (also known as Personal Contract Hire)

Similar to renting, and potentially a cheaper option, but you’ll never own a car. You pay a monthly amount and hand over the car back at the end of a few years.

Before deciding whether you’re buying a car, it’s best to compare the options available to you – and check that you understand the financial responsibilities and implications involved in any deal.

peer-to-peer loans

Another way to raise cash to pay for a car is by opting for a peer-to-peer (P2P) loan. Less traditional than relying on a bank or building society, this form of lending is done through specialist online P2P platforms that match lenders with borrowers directly.

Interest rates can be competitive for potential borrowers with a decent credit record, but lower where the record is poor. There will be an arrangement fee to be paid and the level of consumer protection will depend on the loan that is created and the one who is lending.

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frequently Asked question

How do I keep repayments as low as possible?

Either choosing a cheaper car, or borrowing the least amount that you actually need for the car, is the best way to reduce your loan repayments. Extending your loan over a longer period will result in lower monthly payments, but you will end up paying more overall.

Can I pay off my loan early?

Yes, but it can have financial consequences depending on which company is providing the loan. Some lenders allow you to pay off the loan early without incurring a penalty. However, other providers may charge you one to two months of interest for the privilege. Contact the lender before signing up for a loan.

What happens if I miss a payment?

In the first instance, the lender will contact you to explain why this has happened. If missed payments become a recurring event, you will be recorded as a ‘default’. This will show up on your credit record and hinder any future attempts by you to get new finance. Let the problem continue without a solution and you may face court proceedings or even meeting with bailiffs.

If you run into trouble, the sooner you let the lender know, the better. They may be able to suggest an alternative payment plan.

Can I get a car loan with bad credit?

Yes, but your options may be somewhat limited. Some lenders specialize in this area, such as those providing ‘guarantor’ loans, where a family member or close friend promises to pay back the balance of the loan if the borrower defaults. Expect to pay a very high interest rate in this position to reflect your riskier financial position.

Do I get any protection while buying a used car with loan?

If you buy a car that has a fault or misplacement, your rights and options largely depend on who you purchased the vehicle from and how it was described. Expect less legal protection from a private sale or car auction than from a purchase from a dealership.

With the latter you have statutory rights under the Consumer Rights Act 2015 which state that a car must be of ‘satisfactory quality’, ‘fit for purpose’ and ‘as described’.

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