Buying a new car can often be a necessary purchase you can’t avoid, especially if you need to commute to your place of work or take children to school on a daily basis. Since it is so expensive, it’s often worth looking at finance options available so that you can spread the cost, making the purchase a lot more affordable.
One such option is applying for a car loan to cover the cost of the new vehicle. This means you won’t have to take time saving up the full amount, and instead make the purchase up front. As long as you can afford to make repayments, it means you can comfortably pay off the full amount in a time period suitable for you.
What is a car loan?
A car loan is simply an amount of money supplied by a bank, private business or individual lender, allowing you to buy a new car without having to save up the money beforehand or make the purchase up front with your own personal funds.
It also means that you are supplying your own source of funds in order to purchase the vehicle, which means that on the day you drive the car away, you are technically the owner. This is in contrast to some deals offered by car dealerships, which mean you don’t actually own the car and will have to give it back to the dealership at the end of the financial agreement.
What are the alternatives to a car loan?
By getting a personal loan to buy your car, it means you can technically own the vehicle from the day you pick it up, even though you will still have to pay off the loan over the agreed term.
Alternatives usually come directly from the dealership and offer a potential driver a few other ways to finance the purchase of a new car:
- Hire purchase – this is a common option offered by a car dealer, often requiring a deposit or for you to trade-in your old car. You will have an agreed monthly payment to make, but will technically only own your car once you’ve made the very last payment
- Personal contract purchase – this is in a similar format to a hire purchase, but the monthly payments will be much lower. The reason for this is that you will then have a balloon payment to make at the end. You will have the choice of paying it if you want to own the car, give the car back or take out another PCP on a new car
Is a car loan right for me?
Getting a car loan is just one way you can make buying a new car a bit more affordable. If you are spreading the cost over several months it can make it a lot more affordable, as long as you can keep up with the repayments. If you are already struggling to afford your current monthly expenses, a car loan might not be the right choice for you.
Remember, you will still require a good credit rating in order to be accepted for a car loan, so it is always worth checking your credit report beforehand. This will give you a good indication whether you are eligible for a car loan and allow you decide if you want to apply.
Advantages of getting a car loan
- You own the car from the day you pick it up
- Choose how long you would like to pay it off
- Browse around for the best interest rate
Disadvantages of getting a car loan
- You will need a good credit rating to be accepted
- A credit rejection can harm your credit rating
- Borrowing too much can encourage you to accumulate debt