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How to get away with the best car loan

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Buying a car is one of the most important purchases of your life, after your home. But, unless you have a lot of cash to spare, you will likely need to borrow money to buy a new or used car.

This is what you need to know.

What is the price of a car now?

The cost depends on the make, make and model of the car, as well as any additional features such as additional trims, in-car infotainment, and parking sensors.

For reference, you’ll likely pay between £ 12,000 and £ 17,000 for a small car like a VW Polo or Ford Fiesta, while a larger Ford Focus can cost anywhere from £ 22,000 to £ 36,000 – and You’ll pay more for a premium SUV or sports car.

However, as soon as you leave in a shiny new car, its value begins to drop. Buying a used car from a dealership or private seller is a more profitable option.

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How can I raise money?

There are different financing options when you have just bought a car. If you are buying from a dealership, chances are you will be bombarded with options ranging from hire purchase (HP) to personal contract purchase (PCP).

But if you need to borrow money, one of the easiest and most popular options is a personal loan. It can also be an inexpensive way to borrow over a period of time, depending on your credit history and provided your repayments are manageable.

What is a personal loan?

A personal loan is in the form of an unsecured loan, which means that the money you borrow is not secured by an asset. Thus, the lender will not take possession of your car or your house, for example, if you do not meet the repayments.

When taking out a personal loan, you borrow money and repay it over a fixed period with fixed monthly payments. You repay the loan along with the interest, but receive the money up front.

Beware that if you fall behind on repayments or fail to pay off debt, you will face penalties, a tarnished credit history, and may be sued by a debt collector.

How much can I borrow?

You can usually borrow between £ 1,000 and £ 50,000 as a personal loan with terms ranging from one to 10 years. You can reduce your monthly payments by choosing a longer period. But remember, the longer you take to pay off the debt, the more interest you’ll end up paying.

How much will I pay in interest?

The interest rate you are offered will depend on your personal financial history or credit history, and how long and how much you borrow. Keep in mind that the ‘representative’ annual rate (APR) is generally only offered to 51% of loan applicants. Before deciding on a lender’s rate and offers, the lender performs an eligibility check of your financial history.

Right now, the cheapest loan rates at around 2.8% are available if you borrow between £ 7,500 and £ 25,000, provided you have an impeccable credit history, reaching 12.3% on loans under £ 3,000.

How to get a personal loan?

Check out a comparison service to find a range of potential offers from various lenders. Just enter your basic personal information, as well as how much you want to borrow, for what reason, and for how long.

Once you complete the application process, the money will be sent to your bank, so that you can pay off the car directly and start paying off the loan. It can take anywhere from a few hours to several days for a loan to be approved.

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What are the advantages of a personal loan?

  • Once you use the loan to pay off the car, you will become full owner of the car. Some other forms of financing are more like a lease and require you to return the car.
  • Whether you have a good or an excellent credit rating, personal loans are generally less expensive than financing packages offered by car dealerships.
  • You can choose to buy a car privately or through a dealership with a personal loan – so you potentially have the widest choice of cars.
  • This is an easy way to borrow a large amount of money, provided you meet the lender’s eligibility criteria.
  • The loans are flexible, as they are offered over a variety of periods, from one to 10 years. However, the longer the term, the more interest you will pay overall.

What are the disadvantages of a personal loan?

  • The impact of the global pandemic has prompted lenders to tighten the criteria for accepting loans, so there is a chance that you will not be accepted for a loan. Check with a personal loan comparison service to find out which lenders can accept you.
  • Your payments may be higher than some forms of financing, such as leasing agreements where you actually lease the car over a few years.
  • You will be responsible for maintaining and making all repairs to the car as the owner after you use the loan to pay it off.
  • If you change your car frequently, you will need to sell it and buy a new one when the time comes. Other forms of funding may be more appropriate in this scenario.

What are the other options?

There is a huge range of financing offers available when buying a new car. Here are other ways to raise money:

0% credit card

You pay no interest, but you may struggle to get a credit limit high enough to buy the car, depending on what you want.

Personal Purchasing Contract (PCP)

You take out a loan but you won’t pay off the full value of the car or own the car at the end of the transaction. Either you keep the car by paying a lump sum remaining at the end of the transaction, or you return it or partially exchange it for another car.

Rent Purchase (HP)

You make a deposit and pay the cost of the car in monthly installments. However, you will not own the car until you make the final payment.

Car leasing (also known as personal contract leasing)

Similar to leasing, and potentially a cheap option, but you will never own the car. You pay a monthly fee and return the car after a few years.

When buying a car, be sure to compare the options available to you before deciding which one is the most appropriate – and make sure you understand the financial responsibilities and implications involved in any transaction.

Peer-to-peer loans

Another way to raise the funds needed to pay for a car is to opt for a peer-to-peer loan (P2P). Less traditional than relying on a bank or a mortgage company, this form of loan is carried out via specialized online P2P platforms that connect lenders directly with borrowers.

Interest rates can be competitive for potential borrowers with a decent credit record, but less when the record is uneven. There will be an arrangement fee to pay and the level of consumer protection in place will depend on the loan being taken out and who is lending it.

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Frequently Asked Questions

How to limit reimbursements as much as possible?

Either choosing a cheaper car or borrowing the least that you actually need for a car are the best ways to reduce your loan repayments. Extending your loan for a longer period will reduce your monthly payments, but you will end up paying more overall.

Can I repay my loan early?

Yes, but there may be financial consequences depending on the company granting the loan. Some lenders allow you to prepay a loan without imposing a penalty. However, other providers may charge you between one and two months of interest for the privilege. Check with the lender before taking out the loan.

What happens if I miss a payment?

At first, the lender will contact you to see why this was the case. If missed payments become a recurring event, you will be recorded as “in default”. This will show up on your credit report and hinder any future attempts you make to obtain new financing. Let the problem continue unresolved and you could face legal action or even a visit from bailiffs.

If you’re having trouble, the sooner you tell the lender, the better. They may be able to suggest another payment plan.

Can I Get Auto Credit With Bad Credit?

Yes, but your options may be somewhat limited. Some lenders specialize in this area, such as those who offer “guarantee” loans when a family member or close friend promises to repay the remainder of a loan if the borrower defaults. Expect to pay a much higher interest rate in this situation to reflect your riskier financial situation.

Do I have protection when buying a used car with a loan?

If you buy a car that has a defect or goes badly, your rights and options largely depend on who you bought the car from and how it was described. Expect less legal protection from a private sale or car auction, compared to buying from a dealership.

With the latter, you have statutory rights under the Consumer Rights Act 2015 which states that a car must be “of satisfactory quality”, “fit for purpose” and “as described”.


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