How does online car finance work?
Buying a new car is an exciting prospect – but also one that can be more than a little pricey. Many car owners are turning to online car financing when it comes to upgrading their motor, and this can increase the range of choices that you have, as well as allow you to enjoy more car for your
money, even if your budget is a little low.
But just what is online car finance, and how does it work in reality? We took a closer look.
What is online car finance?
Online car finance is a way of buying a car that has been financed by a bank or another lending institution. It’s often referred to as “car finance”, but there are actually two different types: secured and unsecured. In both cases, you will need to take out a loan from a financial institution to cover the cost of the vehicle. The difference between them lies in the type of security that they offer.
Secured loans come with a lien on the car, meaning that the lender has a claim over the vehicle until the full amount is paid back. This means that if you don’t pay back the entire sum within the agreed time frame, then the bank can repossess the car and sell it at auction.
Secured loans tend to be cheaper than unsecured ones because they’re less likely to go into default. However, they do mean that you’ll have to hand over the title of the car to the lender, so you should make sure you understand exactly what you’re getting yourself into before signing up!
Unsecured loans are much easier to get hold of, as they don’t require any form of collateral. Instead, they rely on credit history and income levels to determine whether you qualify for a loan. If you’ve got a good track record with lenders, then you should find that you can secure a lower interest rate than you would with a secured loan.
But remember, the higher your debt-to-income ratio (the total amount of money that you owe compared to your monthly disposable income), the more risk that the lender takes. So, if you’re struggling to keep up with repayments, you might want to think about taking out a secured loan instead.
What are the advantages of online car finance?
There are plenty of advantages to using online car finance, and some of the main ones include:
- Speedier process
Securing online car finance is usually quicker than going through a traditional dealership. You won’t need to wait around for weeks while your application is processed, and you shouldn’t have to spend hours filling out lengthy forms either.
- More choices
When you use online car finance, you can access a wide variety of cars and models. There are many factors that will likely influence which model you end up choosing, including price, mileage, safety ratings and fuel consumption.
- Lower interest rates
The interest rates that you’ll be charged for online car finance can be significantly lower than those offered by traditional dealerships. This is partly due to the fact that banks aren’t making a profit when they lend money to customers, so they pass these savings onto you.
The flexibility provided by online car finance allows you to buy whatever car you like, whenever you like: provided that you successfully pass the credit check or have the collateral to put down for a secured loan, you will have far more freedom to choose your dream car.
What is a credit check?
A credit check is a process used by lenders to assess your ability to repay a loan. The information gathered during this process includes things such as your employment status, current salary, and your credit rating.
How can I increase my chances of passing a credit check?
A credit check is a necessary part of the car finance process, but it doesn’t necessarily have to be a negative one. Many people believe that having a poor credit score will prevent them from securing a loan, but in reality, most lenders will overlook a bad credit rating if you provide an explanation for why you had problems paying off previous debts.
There are a number of things you can do to improve your credit score, and these include:
- Pay your bills on time
If you regularly pay your bills late, it’s likely that your credit rating will suffer. In order to avoid getting into this situation, make sure that you always pay your bills on time.
- Keep your balance low
It’s important to try and keep your outstanding balances below 30% of your available credit limit. This way, you’re not putting yourself at too great a risk of incurring additional fees.
- Don’t take out too much debt
It may seem tempting to take out a large loan in order to purchase a new car, but doing so could actually damage your credit rating. Instead, look for smaller amounts of cash that you can afford to repay over time.
- Use an app to monitor your spending
One of the best ways to ensure that you don’t get into debt is to monitor how much you’re spending each month. If you find that you’re spending more than you earn, you should start looking for ways to cut back on unnecessary expenses.
You might consider cutting down on eating out, shopping trips and entertainment, or even selling items that you no longer want. Whatever you decide to do, it’s important to stick with it until you’ve managed to reduce your expenditure by around 20%.
You can also set up an automatic payment system through your bank account. By setting up regular payments, you won’t need to worry about missing any payments.
- Make sure your debts are paid off
Another important element in boosting your credit score is to pay off any outstanding debts that you have. It’s worth noting that some types of debt, such as payday loans, are considered unsecured loans, which means that they don’t count towards your overall credit score.
However, other types of debt, including student loans and mortgages, are considered secured loans. These are counted towards your credit rating, so it makes sense to work hard to pay them off as soon as possible.
- Consider securing a loan with a lower interest rate
Many people choose to secure their loans using a personal guarantee, which means that they’ll be responsible for repaying the money if they fail to meet their obligations. When choosing between different types of loans, it’s generally better to go for a lower interest rate rather than a higher repayment amount.
This is because the higher the rate, the greater the chance that you’ll end up defaulting on your loan.
Are there any disadvantages to online car finance?
As with any major financial decision, it is important to be aware of the potential risks and pitfalls of online car finance, and some of the main ones include:
- Ongoing financial obligation
If you opt for online car finance, you’ll still need to continue paying the monthly instalments throughout the life of the loan, and this can be a heavy ongoing financial obligation. In addition, there’s a possibility that you could face a penalty fee if you miss a single instalment payment, so it is crucial that you never take out more than you can afford to pay back.
- You have to pay even if you sell the car
When you use online car finance, you will always have to make monthly payments, regardless of whether you sell the vehicle or not, and this can be frustrating if the car breaks down and becomes unusable, or you are forced to sell for another reason. You will still be required to clear the balance completely, whether the car is yours or not, and this can make it tricky if you need to buy another car.
- It can be difficult to get approved for a personal guarantee
A personal guarantee is essentially a promise that you’ll repay the loan if you fail to meet your obligations, and this can be tricky to secure, especially when the financial climate is uncertain. This can make it tricky to get the loan you need.
- You will likely need to pass a credit check
Even though many lenders offer personal guarantees, they may still require you to pass a credit check before approving you for one. This is because a personal guarantee is often used by companies who want to ensure that they’re dealing with someone who has a good credit history and isn’t likely to default on their loan.
The bottom line
Online car finance offers a convenient way to purchase a new car without needing to visit lots of dealerships, but it comes at a cost. While it can help you save time and money, it also carries its own set of risks and disadvantages, so it’s vital that you understand what these are before making an informed choice. Once you have all the information, you can move forward to purchase your dream car.