Around four in five new cars in the UK are bought – or acquired at least – using finance rather than motorists purchasing outright.
With some 2.5 million new vehicle registrations last year, it means around 2 million are being driven by people paying for them in instalments.
But despite the incredible uptake in these agreements in recent years, motorists still widely admit to not knowing the ins and outs of car finance.
Car finance myth buster: This is Money and Admiral Loans give the answers to 10 of the most commonly asked car finance questions
Admiral, which is better known for providing motor insurance, has been offering a range of car finance options since last December.
In that short time it says it has been asked the same things over and over again, making it apparent that common questions about finance are shared by numerous people.
Not only has it found that drivers don’t understand the different types of car finance options available, they’re also generally in the dark about how and when to use them, where to access deals and the implications of signing on the dotted line.
Scott Cargill, UK CEO of Admiral Loans, said: ‘For lots of people, getting a car on credit will be their first experience of finance so understanding repayment terms, interest rates and running costs on top of what you might do with your new car in the future can be a lot to take in.’
So what are the ten most asked questions – and importantly the answers?
If you’re considering buy a new or used car on finance, you’ll want to know this.
1. What are the different types of car finance?
There are two main types of car finance: Personal Contract Purchase (PCP), which is most popular, and Hire Purchase (HP).
PCP usually requires buyers to pay a deposit and small monthly payments over two to five years.
While many are attracted to the low monthly costs, a balloon payment at the end of the agreement – usually worth thousands of pounds, has to be paid if the drivers wants to keep the car.
This final payment is the estimated value of the vehicle predicted by the finance provider at the start of the agreement, meaning customers are simply paying off the depreciation over time.
If you don’t want to make the payment and keep the car, you can hand it back to the provider.
HP is simpler – you pay a deposit and higher monthly payments that cover the full cost of the vehicle.
There’s usually a purchase fee at the end of the deal, which can be as little as £1 in some cases.
2. Can I only get car finance from the dealer I buy the vehicle from?
There is a common misconception that you can only agree to finance deals offered by dealers selling car.
This misunderstanding can result in customers taking out a loan which isn’t necessarily the best option for them.
Customers are free to shop around for car finance deals outside of the car dealership and get quotes before they even step foot in a showroom.
3. Does shopping around for car finance ruin my credit score?
Making full applications for finance from multiple lenders within a short period of time, whether car finance or otherwise, can set alarm bells ringing for providers and impact on your credit rating.
Therefore, it is recommended that you only do ‘soft credit searches’ when shopping around for quotes until you’re absolutely sure the deal and provider is suited to you and you want to make a full application.
Once you go past this point you’ll incur a hard credit check against your credit profile.
4. Will car finance give me a bad credit rating?
Having a car finance deal in place and making your repayments on time can actually show other lenders you could be considered a ‘low credit risk’, compared to other people with no credit.
However, missed or late payments could make you appear as a higher risk to other lenders, so it’s important to choose an affordable deal and to ensure that you make payments on time.
You can pay off the outstanding finance balance early, but it might incur fees
5. Can I pay off car finance earlier than agreed?
You are allowed to you pay off the outstanding balance in full at any time during the course of the agreement and no lender can refuse this.
However, as with any other type of finance, this can incur some charges or penalties, so it’s best to check what these might be before signing anything.
6. Are PCPs only available on new cars?
While it hasn’t always been the case, Personal Contract Purchase deals are now available for second hand vehicles.
This gives customers greater flexibility on the type of car they can buy and how they can buy it. Admiral is one of the providers that can draw up a PCP plan for a used car.
7. Do I need to pay a deposit or can I spread the full costs across payments?
It ultimately depends on the individual lenders.
Deposits are usually requested to ensure that customers borrow a sensible amount in relation to the value of the car, and to reduce the chances of negative equity in the future.
That said, zero deposit finance is becoming increasingly popular with car makers using it as a ploy to attract customers.
Any provider should give a thorough explanation, plus a list of options available to you, so you can make the choice that best suits you.
8. Do I get my deposit back at the end of a PCP agreement?
If you decide to hand back the car at the end of the PCP, you are not entitled to any money back – even the deposit. But that doesn’t mean you’ll miss out.
If you have paid a large deposit as part of the deal and the depreciation of the car is slower than predicted, the vehicle could be worth more than the final balloon payment.
In that case, you could be better off keeping the car, selling it privately and paying off the balloon payment and then have a bit of cash left over.
But, that’s a lot of ‘ifs’ and ‘maybes’. Stick to your budget, understand what your balloon payment is likely to be, and only contribute a deposit you can afford.
9. How quickly can I get car finance?
Some traditional finance providers or car dealers might need written personal details before finding a deal for you, which could take some time.
But these days you can do it all online, which significantly speeds up the process.
You could get a quote from an online provider in less than five minutes and complete an application in the same amount of time.
10. If my situation changes can I opt out early?
Yes, but only if you’ve paid off half the value of the total loan.
It’s called a Voluntary Termination (VT) and results in the car being handed back to the finance provider without the customer incurring any fees.
What’s most surprising about a VT is that it shouldn’t affect your credit score.
However, if you do opt out of the deal early, a VT mark is placed against the agreement on your file and could result in lenders refusing to deal with you in the future.
For this reason a VT should be a last resort. Again, motorists are recommended to only take out finance they can afford.
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