If you’re thinking about getting a car on finance, there are a number of things to consider. Because while there are a lot of benefits to car finance, there are a few pitfalls too, which you should do your best to avoid.
Weighing up the pros and cons of any finance contract is generally a good idea, as it will typically be a long term agreement. And buying a vehicle can be one of the most expensive purchases you ever make – after your home, your car will often be your most valuable asset. Essentially, this isn’t a decision to take lightly! Make sure you do your research, and determine whether car financing is the right choice for you.
To help you get started, we’ve outlined some of the biggest advantages and disadvantages of car finance below:
Advantages of Car Finance
When it comes to taking out a car loan, there are various benefits. Some are more obvious than others though, and how you rank them will depend on what getting a new vehicle means to you. Will it reduce your commute time, if you no longer need to take public transportation? Perhaps a new car means more weekend breaks? For a lot of people, their own vehicle simply means freedom. Here are a few more advantages:
1. Spread the Cost of Repayment
When you buy a car on finance, you don’t have to pay the whole cost upfront. Saving up to buy a car can take years, and you may not be in a position to wait that long! For instance, certain jobs require you to have a car, or you may live in a remote area with few other transport options. Spreading the cost of a vehicle over a few years allows you instant access to the car, without needing to save up.
2. Drive a Better, More Reliable Car
If you were to purchase a car outright, chances are, it would be on the cheaper end of the scale. This will typically mean an older model, with a lot of mileage. While older cars can be fairly reliable, the inevitable wear and tear will soon become expensive to fix. Not to mention the fact that newer cars generally come with exciting new features, and are often cheaper to run!
3. Fit a Car Into Your Budget
There are a lot of options with car finance – whether you’re looking to get a Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement, you should be able to find something that suits your budget. And as you’ll be making fixed monthly payments, you’ll be able to factor these payments into your monthly expenses, and ensure that you’re not overspending.
4. Get a New Car More Often
If you’re the sort of person who likes getting the latest model of car, vehicle finance is a great option. For example, with PCP, you can simply hand back your current vehicle at the end of your term, and opt for a newer model. Even if you’re not fussed about the make and model of your car, exchanging your vehicle for a new one may simply give you peace of mind. You’ll know that you’re getting a reliable car, which should mean better mileage and fewer repairs.
5. Improve Your Credit Score
Another advantage of getting a car on finance is that you can help boost your credit score. Your credit score is calculated using information on your credit file, which contains details about any loans or other forms of credit you’ve taken out. Making regular payments on time will demonstrate that you’re able to manage your money well, and your credit score should improve accordingly. This means that if you want to take out further credit, you should be offered better interest rates, and have a higher chance of approval.
Disadvantages of Car Finance
When it comes to the pitfalls of vehicle finance, there are a few things you should look out for. If you’re aware of these potential disadvantages, you can try to avoid them, or at least limit the risk.
1. Paying Interest
With pretty much any type of loan, you’ll be expected to pay interest. This means you’ll be paying above the retail value, though of course you do get the benefit of spreading the cost of the car. The actual interest rate you’re offered will generally depend on the lender, as well as your personal credit history. So to get the lowest interest rates, you’ll need to try and increase your credit score before signing the loan agreement.
2. Risk of Losing the Vehicle
As car finance is a type of secured loan, if you’re unable to keep to the repayments, you do have the risk of the vehicle being repossessed. Defaulting on the agreement will typically mean the lender will look for other ways to reclaim the loan value. Though it is important to bear in mind that for many people, car financing is the only way a vehicle is within their budget – they can’t simply buy one outright. Overall, with a car loan, you have to make sure you can comfortably afford the monthly instalments, or risk losing the vehicle.
3. Potentially a Tighter Budget
Making monthly car finance payments may stretch your budget. If you don’t have a lot of disposable income left after making these payments, along with your usual expenses, an unexpected cost could put you in a tricky situation. For example, if your boiler were to break and need replacing, you may have to make lots of cutbacks, or consider taking out more credit. So it’s important to think carefully about what sort of vehicle you can afford to take out on finance, and your maximum monthly payments.
4. Mileage Limit
Most car finance agreements come with a mileage limit, which can be anything from around 10,000 to approximately 30,000 miles. You will be able to discuss this with your finance provider before the agreement is finalised. Mileage limits won’t affect everyone – it will depend on how many long journeys you take in a year. Make sure you factor in these trips when negotiating your mileage limit, as you don’t want to be hit with any penalties.
5. Insurance and Liability Cover
When you finance a vehicle, there’s a good chance that it will be a newer model, and will therefore have a high value. This can mean that your insurance premium will be higher. You may also be expected to take out additional liability cover, so that the lender can ensure their assets are protected. If you want to avoid these extra costs, it may be a good idea to get a second hand vehicle on finance, instead of a new car.
Overall, there are a number of pros and cons to car finance, but for most people, it’s the best way to purchase a vehicle. You simply need to choose the right agreement, and work out your budget beforehand.
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