Finance options for car purchases aren’t a new thing. Millions of people use credit to afford a new car and to enable them to purchase a vehicle that would otherwise be outside of their affordability.
While the allure of any car finance deal might be strong, it’s crucial that you grasp the intricacies of the agreement and its affordability before you commit. This understanding not only empowers you to make informed decisions but also gives you the confidence to drive off the forecourt in your new set of wheels, knowing you’ve made a sound financial choice.
These days, lenders are stricter about what they approve for car financing. Thanks to a judgement allowing PCP Claims for mis-sold agreements in the past, which is a legal process to claim compensation for mis-sold car finance agreements, it’s still worth investigating if you can actually afford a new financial agreement so you’re not finding yourself in a similar position (and if you’re entitled to a refund for any previous credit agreements you might have had while you’re doing so) before you head out car shopping.
These tips can help you ensure that you can really afford any repayments you might need to make for your next car so you’re not stretching yourself too thin.
Budget
Experts suggest that no more than 10% of your income should be on car finance payments, and total car expenses should be under 20%. However, not everyone has that amount of money free in their budget just for car costs alone.
Let’s say you bring home £500 per week. 10% of that is £50, and 20% is £100 per week. Worked out monthly; this is a maximum of £216 for car finance payments and £433 total, including insurance coverage, fuel, repairs, breakdown cover, etc. Can you afford this amount easily?
It’s essential to realistically incorporate these costs into your budget or make necessary adjustments to ensure you can comfortably afford the car. This responsible approach not only prepares you for any potential financial challenges but also gives you a sense of control over your car finances.
Checking your credit score can give you a glimpse of the type of credit agreement you might secure. A higher score and a good credit history can open doors to more favourable terms and interest rates, serving as a motivation to maintain or improve your financial standing.
Agreement Terms
The terms of the agreement you are looking to sign up to play just as important a part as the cost, too. There could be conditions you are bound to for your payments that make it harder for you if you experience financial difficulties.
What happens if you can no longer afford the repayments due to a sudden job loss, unexpected expenses, or a major home repair?
Understanding the terms of the agreement is crucial. It allows you to be aware of your options should circumstances change and ensures you know exactly what you’re getting into.
If you’re looking at getting a car on PCP (personal contract purchases), then you need to know the following details as a minimum (some details can change depending on the provider and your status).
- A deposit of 10% is typically required prior to signing up for the contract.
- The cost of the finance will vary depending on how much the car’s value drops during your ownership (usually 12 to 36 months).
- The deposit comes from the above figure, and interest is applied.
- A balloon payment, the equivalent of what the car is predicted to be worth at that point, will be required at the end of the term. This means you need to have a plan to either make this payment, trade the car in, or hand the car back.
- There will be annual mileage limits.
- If you miss or fall behind with payments, you might be at risk of the car being repossessed.
- You might be able to end the contract early by trading it in for a different car, making the balloon payment, or handing it back.
Duration of The Contract
Something that can be overlooked is the duration of the contract and the interest added to the car, especially if you’re paying a smaller deposit and opting for a longer payment term.
While interest-free credit options are available, you need to have paid the full amount prior to this date to avoid the interest, or you will suddenly accrue interest at the set rate when you sign the paperwork.
Typically, for car finance agreements, the longer you pay, the more interest you will pay, as you are lending the money to afford the car for longer.
While lower payments might be enticing, you need to be aware that you will be locked in for multiple years and be confident you can make the payments on time each month to avoid further costs or charges and the risk of repossession.
Ownership Costs
Let’s talk about the ownership costs of the car you’re considering. Some cars have higher maintenance costs than others, and different fuel systems will dictate the amount of road tax you pay. The engine’s size can also influence your insurance premiums and fuel consumption, and you can expect higher costs associated with larger or more upmarket vehicles simply due to the construction and expertise needed to carry out repairs.
While no more than 10% of your income should be assigned to these costs, as per the example above, you need to understand the vehicle’s ongoing running costs to be confident you can afford it, especially for older models.
Sit down, run through the numbers, and get an idea of what type of car finance deal you might be offered so you can understand what type of car to look for and the ongoing operating costs to ensure you can afford it.
Affording a car on finance is about more than just your monthly repayments. You will want to know exactly how much you will end up paying with interest added or terms imposed, such as balloon payments. You need to be confident that you won’t be paying excessively more than the car will ultimately be worth due to interest and that you can afford the finance repayment each month and the ongoing monthly costs to care for and use the vehicle.