A car purchase is one of the biggest investments you will make in life and for many of us, their car is their lifeline so it’s important that your decision is the right one. There’s a couple of ways you can purchase a car so the guide below looks and each in more details and gives an overview of running costs so you can budget effectively for your next car purchase.
Buying a car with cash.
One of the most cost-effective ways of getting a car is to pay for it with cash. When you buy outright with cash, you will be the legal owner of the car from the start which means you can sell it whenever you want and make any modifications with no impact. It also means that you don’t need to pay any interest on monthly payments and can even give you more negotiation power when buying the vehicle. The only drawback of buying with cash is the fact that both new and used cars can cost thousands of pounds to buy and for many drivers, this may not be realistic. Due to this, more drivers than ever are choosing car finance to help spread the cost.
Financing a car.
Car finance is a popular way to get a car and pay for it monthly over an agreed term. You can set your budget credit score and loan term length and calculate your car finance payments to see how much you could borrow. There are a number of car finance agreements to choose from too and you could be better suited to one form of finance over others. To set a monthly budget for car finance payments, you should take a look at how much money you have left over once all your bills have been paid and see how much you could comfortably afford to pay. Car finance agreements usually last a number of years so it’s important your budget is realistic and affordable and that your circumstances aren’t going to change in the near future.
What to consider when budgeting for car finance payments:
If you are looking to go down the finance route, it’s worth remembering that car finance is never guaranteed to anyone, and you will need to meet the lenders criteria first before you could receive an approval. The interest rate and car finance deal you can get access to can be determined by a number of factors, such as credit score, deposit contribution and the loan term.
1. Credit score.
Your credit score is really important for car finance. Lenders use a credit check to see how you’ve handled your finances in the past and based on your previous behaviours, determine the level of risk to lend to you. Based on your history of making repayments and current level of debt, they can assess how likely you are to meet future repayments. Lender’s favour those with a strong history of meeting payment son time and in full as they are less likely to default on future loans. If your credit sore is low, it can be a good idea to take some time to improve your credit score in the run up to a finance application.
2. Deposit contribution.
Some car finance deals can require you to put down a deposit of around 10% at the start of your agreement to secure the deal so it’s keeping in mind before you start applying. You can get a car on finance with no deposit to pay but a deposit at the start of your deal can be beneficial. The more money you put down at the start of your deal, the lower your loan amount will be. A lower loan amount can then mean lower monthly payments, or it means you could afford to pay your loan off faster by reducing the loan term.
3. Loan term length.
You can choose how long you want to pay your loan back over and usually car finance agreements last between 3-5 years. It can be tempting to spread your loan over the longest term as it will help to lower your monthly payment, but it can also increase your interest rate and make the overall loan more expensive than it needs to be. You should try to choose the lowest term length for your budget to help make your deal more cost-effective.
Once you’ve bought the car or have secured a car finance deal, unfortunately, the payments don’t stop there! If you want to budget for a car effectively, you could also consider the cost of running a car too. Car insurance and road tax are a legal requirement in the UK so you will have to budget for these, and you will also need to have regular servicing and MOTs to help keep your car in its best condition possible.