Many people jump into a car finance deal without a second look. It can be an exciting time though, especially if you’ve struggle to get approved before. A car loan allows you to spread the cost of a vehicle into affordable monthly payments over a number of years. For drivers, this usually means you can get a better car than you would with cash and use the finance terms to benefit you. If you fail to prepare for your car finance application properly, you could be making your finance more expensive than it needs to be or you may even be refused a car loan! Read our top tips on how to prepare for a car loan the smart way.
Check your credit report.
Preparing for a car loan means checking your current loans and credit. Your credit report can give you an insight into what lenders see when they perform a credit check on you when you apply. A credit check is important as it helps lenders to decide if they want to offer you a loan or not. Based on your previous history of credit, lenders can make assumptions about which type of borrower you will be in the future. Make sure all your information is accurate and up to date and if your credit score is low, work to increase your credit score before applying for finance. A lower score could see your finance be decline or get you a higher interest rate offered.
Reduce debt first.
If you already have high levels of credit or finance, it can be harder to take on anymore. Maxing out your credit limits also negatively impacts your credit score, and you should try to only use around 30% of your available limits at once to boost your score. If you already have credit cards, loans, finance, or a mortgage, it can be harder to budget for a car on finance. Where possible, you should try to reduce some of the debt you owe before you take on a car loan.
Save up for a deposit.
Depending on the type of car finance you choose, you may be required to put down a deposit at the start of the deal so it’s worth remembering. Some deals could want as much as 10% deposit at the start of the agreement in order to secure the car you want. It can be beneficial to save up for a deposit in the run up to your car loan application.
Set a budget.
Your budget for a car loan needs to be affordable and won’t change over the course of your finance agreement. Failing to stick to the rules of your agreement and not making your payments on time can have a detrimental effect on your credit score. By using a car loan calculator you can get an idea of which cars you could afford by setting your monthly budget, loan term and credit score. By adjusting the loan term, you can get an idea of how the length of the loan affects your monthly payments and also your interest rate. A longer loan term may seem attractive as it reduce the monthly amount, but it could mean you pay more interest overall.
Compare both new and used cars.
It’s a common misconception that if you’re on a low budget, you can only get a used car. Whilst used cars are great for keeping costs low and having a better resale value, you should also compare brand new car deals too. Agreements such as PCP can offer low monthly payments as much of the value of the loan is left till the final balloon payment and only needs to be paid if you wish to keep the car.
Use a broker.
More drivers are taking the finance first approach and using an online loan company or car finance broker to help sort their finance. Once you’ve been approved by a lender, you can then shop for a car in your budget from a verified dealership. Car finance brokers help customers to find the best finance deal from their panel of lenders. This means you can compare multiple lenders at once without making numerous applications for finance.