Is it easy to get car finance?
Car finance is an innovation that has become increasingly popular in recent years, and it offers a great opportunity for car owners to get their hands on their dream vehicle, even if their budget is a little low. The right car finance allows you to spread your payments, enjoy greater flexibility over your purchase, and get behind the wheel of your dream new car in next to no time.
You may be wondering, however, just how easy it is to get car finance, and whether you are likely to be successful in your application?
Below, we take a closer look at the essentials of car finance, including the steps you can take to boost your chances of a successful application, and securing your perfect car.
What is car finance?
Car finance simply entails borrowing money from a bank or another financial institution to pay for a car. You will usually need to provide them with some form of security, such as a car title, which they can hold until you have paid back all of the money borrowed. Once this is done, you will then own the car outright, but until the final payment has been made, the lender reserves the right to take the car back.
The process of getting car finance is very similar to applying for any other type of loan – you will fill out a simple online form, providing details about yourself and your current situation, and answer questions regarding your credit history. This information is then sent to one of many lenders who specialise in offering car loans, and once you receive a response, you will be asked to complete a short questionnaire before being given a quote for your desired car.
The main difference between car finance and other types of lending is that in many cases you do not actually make a down payment when you apply for car finance – though it is possible to make a larger initial payment to reduce the monthly payments for the duration of your loan.
In many cases, the value of the car itself is used as collateral, meaning that the amount you borrow is based on its estimated market value. If you decide to sell the car later, you will still owe the same amount as you did when you bought it, so you could end up losing more than you would have, had you taken out a traditional loan. You will also need to continue making payments until the loan is paid off, regardless of whether you sell the car or not.
How much can I borrow?
Once you have received a quote from a lender, you will be able to choose what kind of car you want to buy, and how much you wish to borrow. There are two main options available:
- A secured loan is where you agree to give the lender a lien against the car’s title, allowing them to repossess it if you fail to repay the loan.
- An unsecured loan does not require you to give the lender a security interest in the car, meaning that you can keep the car if you cannot afford to repay the loan. However, if you default on the loan, the lender can repossess the car without having to go through legal proceedings.
While there is theoretically no limit on how much you can borrow, the size of your monthly repayment will depend on the amount you have borrowed, the length of your loan term, and the rate of interest charged by the lender.
Is it easy to get car finance?
When you apply for car finance, you will usually be required to provide some personal details about yourself, including your name, address, date of birth, occupation, income and savings. You will also be asked to provide proof of identity, such as a passport or driving licence.
You will also be asked to state your reasons for wanting to take out a loan, and your financial situation. For example, you might say that you are planning to use the car as a second or third hand purchase, or that you plan to use the car as part of your business. If you are borrowing a large sum of money, you may be asked to provide information about any existing loans or credit cards.
The lender will then look at all this information, along with the car’s condition and history, to assess whether they think they can lend you the money you need. They will compare the value of the car with the amount you have borrowed and work out what their maximum lending limit is.
The lender will then present you with a number of different quotes, depending on the type of loan you request. These include:
- Fixed rate
A fixed rate loan offers a set payment each month, regardless of how much you owe. While this makes it easy to budget, it may mean that you miss out on potential savings if rates fall over the course of the loan term.
- Variable rate
With a variable rate loan, the lender sets the interest rate each month based on market conditions. This gives you more flexibility when it comes to managing your finances, but you may end up paying more in the long run because the rate rises over the life of the loan.
- Interest only
An interest only loan allows you to make payments while the balance remains low. Once the loan has been paid off, you will still own the car.
- Personal contract hire
With a PCH loan, you agree to pay back the full amount of the loan within a specified time frame. After this point, you will become the owner of the car.
If you decide to accept one of the offers, you will need to sign a contract agreeing to repay the money. You will also be given a repayment schedule, detailing exactly when you must start making payments.
Once you’ve accepted a quote from a lender, you will be sent a formal application form. You will usually need to complete this before you can proceed with the process. The application form will ask you to confirm certain details, including your name, contact telephone numbers, email addresses, employment status and current salary.
Once you’ve completed the form, you’ll need to send copies of the following documents to the lender:
- Proof of ID
A copy of your passport or driving licence.
- Proof of income
Your most recent payslip (pay slip) showing your gross monthly earnings.
- Proof of savings
A bank statement showing your average monthly savings.
- Proof of equity
A valuation certificate stating the vehicle’s current value.
In addition, lenders may require you to submit other documentation, such as:
- Vehicle history report
This report shows the car’s previous owners and its mileage. Lenders may also want to see an MOT certificate and log book if you are purchasing your loan separately to the vehicle in question.
- Car valuation certificate
This document states the car’s worth and helps lenders determine whether they can offer you a competitive deal. If you’re buying the car for cash, you should get a valuation done by a professional valuer.
- Proof of insurance
You will also need to provide proof of insurance cover. This could take the form of a policy issued by your insurer, or a letter confirming that your existing policy covers the car.
The last thing you need to do is check that all the information provided is correct. Make sure that everything matches what was written down on the application form. If there are any discrepancies, the lender will let you know about them during the next stage of the process.
The application process
Once you have submitted all the required paperwork, you’ll receive a response letting you know whether the lender is interested in taking your application further.
If you are lucky enough to receive a positive reply, you’ll then move on to the second stage of the process. At this point, you might be asked to attend an appointment at the lender’s office. During this meeting, you’ll be able to discuss the terms of the finance agreement and finalise the details of how much you’ll need to borrow.
At the end of the meeting, you may need to give the lender a deposit. This acts as security against any problems that might arise later on. For example, if you default on your repayments, the lender can repossess your car and keep the deposit. In some cases, the deposit acts as a downpayment and can reduce your monthly repayment.
Car finance can be a great way to help you get your hands on your dream car – but this isn’t something to be entered into lightly.
It is important that you have all the facts to hand, and that you have double-checked you are able to meet your financial obligations each month for the life of the loan.
So, now that you know a little something about what’s involved in seeking and obtaining car finance… why not apply today to discover what car you could get your hands on?