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How To Be Credit Clever When Buying A Car

How To Be Credit Clever When Buying A Car

When it comes to buying a car, how to finance your purchase can be confusing. There are lots of options – from PCHs and PCPs to using personal loans or stumping up cold hard cash for your new wheels. But how do you pick which is the best choice for you?

Before we get stuck into the credit options, let’s look at how buying a car need not mean borrowing money. Good, old fashioned cash.

Buying a car with cash

Buying a car outright with cash is without a doubt the simplest way to get your hands on a new motor. There’s less paperwork to fill in, none of the worry about whether your finance agreement will be approved, and once the car is safely on your driveway, no monthly payments to remember. The car is yours! Aside from the simplicity that comes with paying cash, there are a lot of other advantages, and some things to watch out for, too.

You could pay less

According to the Money Advice Service (MAS), 64% of people manage to haggle the price down when buying a car. Haggling is so common that car dealers expect to have to negotiate with you. However, this also means that they often have systems in place to help keep their prices high. You might find dealers saying that their prices are set “by head office”, so there’s absolutely no wiggle room on them. Or, they might offer to include more in the asking price, rather than discount it. Extras up for grabs can include anything from free servicing for a number of years to new rubber mats for your footwells. One thing is for sure, though, if you don’t ask, you definitely don’t get!

Or at least, you won’t pay more…

You might also find that these days, dealers are less enthusiastic than you’d expect about a cash buyer. This is because they often make quite a bit of money from buyers using their finance options. Car dealers partner with loan providers to offer car finance, and many salespeople work to targets and are paid commission by the loan provider for every customer that they get to sign up to a certain type of finance agreement. Because they want you to take a finance deal, there’s likely to be much more flexibility and room to haggle on them than there is with cash. But, the dealer’s loss in this respect is your gain. By paying in cash, you won’t be paying any interest. So, even if you can’t negotiate the price down much, you’ll still pay less in the long run.

And you’ll definitely only pay what you can afford

The other advantage of paying cash is that the sum of money in your savings account is your budget. You know exactly how much you have to spend, and you can’t go over, because the money isn’t there!

Spending a large amount of your hard-earned and hard-saved money in one fell swoop can be nerve wracking. It can even sting a little as you watch your savings balance go from hero to zero! But, the impact this has on you will make sure you don’t part with your money easily, so you’re less likely to be swayed by smooth sales patter, and the car you eventually come away with will be exactly what you want for your money.

Buying a car with a personal loan

First of all, let’s be clear about what we mean by a personal loan. A personal loan is an unsecured loan. It isn’t a car loan, or a specialist finance detail that is secured against the car. You can find out more about these finance deals in our guide to PCP, PCH and car finance. Personal loans can often be quick to get, but may come with a higher interest rate than you’d get on a specialist car finance deal.

No savings needed

Using a personal loan to buy a car gives you the ability to act like a cash buyer, but without the months or even years of saving to buy the vehicle you want. You can get a personal loan for the entire value of the car, or get a smaller amount to top up your savings – they’re quite flexible.

Because, by the time you hit the dealership, you’ll have the loan in your bank account and will to all intents and purposes be paying cash, you can expect the same perks and drawbacks when dealing with salespeople at your chosen dealer. While you may well be able to haggle your way to a bargain, you might also come up against some resistance from them when they realise they aren’t going to make any interest or commission from you.

You’ll need a decent credit score

To get a personal loan at a cost-effective interest rate, you’ll need to have a good credit score. The better your credit score, the more options you’ll have when it comes to deciding how much to borrow, and how long you take to repay. A longer loan term will mean lower monthly payments, but will result in more interest paid back overall.

With CredAbility, you can get an instant idea of the kinds of rates and terms available to you by checking out the Deals section. All of the offers you’ll see are based on your current credit score, and you may find that you’re pre-approved for some of them. Just make sure you’re logged in to your account first, or sign up today!

You’ll own the car straight away

When you use a personal loan to buy a car, as when you pay in cash, you own the car straight away. But, unlike when you pay in cash, you still have a debt to repay even though you own the car. You’ll need to repay the loan whatever happens to your car, whether you keep running it happy as Larry, or if you’re unfortunate enough to have an accident that writes it off. Even if the car no longer exists, you’ll still owe the loan repayments for it.

Buying a car with a finance deal

PCPs, PCHs, hire purchase… there are all sorts of finance deals out there to help you get your hands on the car of your dreams. But are they good value compared to other types of credit you could use?

There’s room to haggle

As we mentioned earlier, car dealers want you to use finance to buy a car, so that they get their commission from the loan provider they’ve partnered with. This means that you’ll often find finance deals come with added extras that make them seem extremely attractive, and if they don’t, you can haggle for them. The interest rate on your car finance could be negotiable, as well as how much of a deposit you need to put down. You might even be able to haggle to get servicing and maintenance included in your finance plan!

Access to better cars

With most finance deals, the deposit you need to put down is around 10% of the cost of the car you want to buy. This means you could potentially buy a much better car than you could afford to buy outright, by using your savings as a deposit and then paying monthly for the rest. From time to time, dealers may also run offers where they’ll contribute to your deposit themselves to reduce your initial outlay, or allow lower deposits in the first place. Be wary of low deposit offers, though, as even though you’ll pay less upfront, this means the amount you’re borrowing will be higher, and so you’ll end up paying more in interest.

But you will need a good credit score

To access the best interest rates on finance deals, or to be able to haggle with the dealer over the interest rate they charge you, you’ll need to be in a strong position with your credit score. Like all credit, the interest rate you pay on a car finance deal reflects the risk a lender thinks there is of you not paying them back. If you don’t have a fantastic credit score, then it’s likely that the interest rate you’re offered will be higher, and that you won’t be able to negotiate it down. If you have an excellent credit score, though, then you can use this to negotiate for a lower interest rate as the risk of you not repaying should be extremely low.

You won’t own the car straight away

With a finance deal like PCP, PCH or Hire Purchase, you won’t own the car straight away. You may not own it, or even have the option to, at the end of your repayment term either, despite all the payments you’ve been making. If you want to change your car every few years, then the kind of finance deal where you pay monthly and can hand the car back at the end of the term may work well for you. But, if it’s important to you that you own your car after paying for it over a number of years, then consider your options carefully and make sure that you either will, or will have the option to own your car, before you commit to a finance scheme.

Important things to consider when buying a car

When you’re buying a car in cash, on finance, or personal loan, there are a few important things to consider:

  • Have you thought about the cost of running the car? Getting the car off the forecourt is one thing, but you’ll also need to insure it, tax it and fuel it if you want to drive it around. You’ll also need to keep it roadworthy and pay for MOTs every year once the car turns three years old. All of these costs add up, so it’s important to factor them in, alongside finance repayments, when you’re working out the amount of your budget you can put into buying a car.
  • What will you do if you can’t repay the loan? If you’re not paying cash from your savings, then you’ll likely have a debt to repay once the car is sitting on your driveway. With car finance that’s secured against your vehicle like PCP, PCH or Hire Purchase, the dealer can repossess your car if you fall behind on your payments. But, if you paid on a credit card or using a personal loan, they can’t do this. In this case, if you really can’t afford to keep up with your monthly payments, then you may want to consider selling or downgrading your vehicle to reduce your debt.


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