Car finance is commonly used by drivers who wish to spread the cost of their next car. Whilst car finance can be very rewarding, it can be very easy to get into debt if you fail to keep up with your car finance payments. To make sure you’re getting an affordable car finance deal or to help you decide if it’s even right for your situation, read our top tips below.
1. Set a budget and stick to it
If you’re approved for finance, you will need to make every monthly payment until the end of the term, which can be over several years. Use a free car payment calculator before you apply to see what kind of loan you could be offered based on your credit score, monthly budget, and loan term. Your monthly budget should be realistic and if you think your income will change soon, car finance may not be the best solution for you.
2. Make overpayments
An easy way to avoid car finance debt is to make overpayments. An overpayment is when you make an advanced payment on your finance, aside from your monthly payments. You may be able to make overpayments if you find yourself with some extra cash to hand. An overpayment can help to pay off your loan faster and could even help you to save on interest rates.
3. Choose low interest
When searching for car finance, you should solely focus on the monthly payment. Many drivers find low monthly payments attractive, but it could be hiding high interest rates. Make sure you shop around for the lowest possible interest rate you can find. Your rate of interest could make your finances more expensive overall. To help lower your interest rate, you could consider improving your credit score, comparing finance deals, or shortening the loan term length.
4. Find a reputable lender
If a car finance provider is offering you guaranteed car finance without knowing anything about you, it’s more than likely too good to be true. Finding a reputable finance lender is key to getting a deal that’s right for you. You can read online reviews of finance and check their status with the FCA to make sure they’re legitimate. You can alternatively use a car finance broker to help sort your finances and compare lenders on your behalf.
5. Save for a deposit
Make your next car finance deal more affordable by putting some money down at the start of the agreement. Some finance deals can require as much as 10% of the purchase price of a car to secure the deal so it’s worth considering. When you put money down at the start of the agreement, you are reducing the overall loan amount. A smaller loan can be easier to pay off and can reduce your monthly payments.
6. Check your credit score
Your credit score is important to your financial life and can affect your ability to get approved for loans. Before you set your heart on getting a car on finance, it’s best to check your credit score to see where you fall on the credit scale first. This gives you time to prepare if you need to improve your credit score. A bad credit score can make financing a car more expensive as you are more of a risk to lenders, or you may be refused a car loan.
7. Choose a cheaper car
Finance deals such as hire purchase split the value of your chosen car, with interest into equal monthly payments. So, if you choose a cheaper car, your loan amount and monthly payments would be lower. If you’re on a budget and want to avoid getting into debt, you should only ever borrow what you can afford to pay back.
8. Part exchange your car
If you already have a car, you can use it as a part exchange for a new car on finance. Part exchanging your car is when the dealer gives you a valuation for your current car and if you accept it, they take your old car and use its value to reduce your new car loan. This means you get a new car on finance and have already paid some of the loan off with your existing car.