Buying your first car is a right of passage and certainly a mile stone in all our lives; cars could signify our first foray into adulthood, leaving the nest and best of all, independence.
The feeling of being independent and getting your own wheels is amazing, even if you’re coming to it a little later in life. However, one of the hardest things to manage when you are looking to buy your first car is how to finance it.
Options might be a little bit more limited for young people who have not yet established a credit history for lenders to base an assessment on. This can certainly throw up a road block, especially for those people who are a little short on available funds. Fortunately, our guide is here to help you understand that there are more options available to you than you might initially think.
The options available for you for funding your first car include:
- Auto Loans
- Personal Loans
- Hire Purchase
- Personal Contract Hire
An auto or car loan is a type of secured credit that could give you access to the money you need to buy your perfect first car. This is one of the most common and popular means of financing because it is a low cost and manageable option. Unlike unsecured car loans, the vehicle itself will be tied into the loan agreement as collateral.
Many people get confused between dedicated car or auto loans and a personal loan taken out for the purpose of buying a car. The difference is simple, a personal loan will be unsecured whereas a dedicated car loan will be secured with the value of the car. A secured loan can sometimes work out cheaper because the risk of lending is offset by the value of the car.
Car loans are extremely flexible, with high lending limits. Car or auto loans are typically available for sums anywhere between £2,000 and £25,000, but approval is likely to be subject to your credit history and income ratio. This means, if you don’t earn too much or haven’t taken too many loans out in the past, you might not be approved for a bigger loan.
The repayment terms for a secured car loan is also flexible, these can span anywhere from one to seven years, as standard. Other types of secured loans are typically available over much longer periods. Payments can be made in equal, monthly instalments. This means you know exactly how much you need to pay every month throughout the term of the loan, which makes budgeting so much easier to calculate.
Dividing your monthly instalments equally will also mean you can avoid a balloon payment, which is incorporated in the structure of other car financing options (PCP). This structure leaves owners with a huge bill (sometimes half the value of the car) to pay at the end of the term agreement, which could leave uncapitalized people (or those who simply forgot about the balloon payment) in an urgent financial situation that leads them to stack on another debt or seek credit elsewhere.
Secured car loans are easy to apply for, especially online. You can apply at any time of day and be approved within 24 hours, depending on the provider. This allows customers who are searching on national dealerships or car sales websites, such as the most used in the UK, auto trader, to get access to money as soon as they find the perfect car, wherever it is in the country. With a secured loan behind you before you go to the dealership or for the test drive, you may be in a better position to negotiate the price and get a cheaper deal. This is because salesman will just want money across the line as soon as possible.
Why You Should Consider Car Loans When Buying Your First Vehicle
Pros Of Car Loans:
- Easy Access To Cash Without An Established Credit History – Using a secured car or auto loan to finance your first car is an extremely safe option. As with all financial products, it’s imperative that you take the repayments seriously. However, you are most likely to be accepted for this kind of loan, in comparison to unsecured loans, because the risk of lending has been offset.
- Build Up Your Credit Score – Young people who are looking for their first line of credit may have been refused by some providers because lenders can’t tell how responsible they are. Taking out a car loan is a cheap and safe way to build a solid foundation for a credit score (as long as repayments are met on time). This could make credit cheaper in the future.
- Cheap Monthly Repayments – APRs and interest rates on secured car loans are typically quite low. This makes them an extremely affordable method for buying your first car, perfect if you are just getting started in your career and are paying your dues or are planning on going off to university in the future.
- No Cash Deposit Required – When you are approved for a car loan, you could have incredibly quick access to the cash you need. This means you can effectively pay cash to the dealer or private buyer, because the money can come from your current account.
Cons Of Secured Loans:
- Your Car Could Be At Risk – It is really important to ensure you can meet the repayments of your car loan. If you default on the loan, the creditor has the right to reposes the car, until the full repayable amount is paid back.
- There Might Be A Minimum Loan Requirement – If you are shopping for your first car, you might have a strict budget. To make a secured loan profitable (because they charge quite low interest) creditors are likely to set a minimum loan, typically from around £2,000. Alternative financing options are available at lower minimums (personal loans will usually be closer to £1,000). It is extremely important that you do not over commit to a secured car loan that is higher than your budget allows.
Are Personal Loans A Better Alternative?
A personal loan, as we have already mentioned, is a type of unsecured credit. This means the car will not be tied into the agreement and the loan is straightforward between the consumer and the lender.
One of the best things about using a personal loan to buy your first car is that the car will be totally yours. You will still owe the finance company or creditor however much money you borrowed, plus interest and fees, but there is no risk of them coming to reclaim it because you are late on a payment.
Personal loans are extremely common, and as there is a current flood of investment in this area of the consumer credit market, lenders are open to riskier investments, especially in comparison to traditional banks. This might mean that you can get approved for a personal loan, even without a prime credit history, or too much of a history at all.
Online, direct lenders can also pay money into your account within an hour of approval – sometimes quicker, sometimes a little slower. This means that you can snap up the car of your dreams as soon as you find it. Moreover, the application process is simple and sometimes quicker than secured car loans, because there are not as many variables, i.e. the value of the car. When you also go direct to an online lender the entire process will be streamlined and there is no risk of data sharing.
Personal loans are low risk, flexible and easy to manage. You can select exactly how much money you want to borrow. This reduces the risk of over borrowing, and unlike secured loans, minimums are likely to be quite a bit lower (from around £1000). This means you can buy a car that is suitable for your budget. Payments can also be spread over a term that suits you, but remember, a longer repayment period could make the total cost of the loan more expensive.
Guarantor Personal Loans – Unsecured loans might be a little harder to come by for someone with a limited credit history. This is because you might be an unknown entity to creditors, who will therefore be unwilling to lend to someone they have no information on.
To offset this, and to make yourself more attractive to lenders, you could get a parent or someone you know (and trust) to sign into the loan with you as a guarantor. Essentially a guarantor promises to meet the repayments if you are unable to. This is another good method if you are working to establish a positive credit score, but you should be planning to meet the repayments on your own, without the assistance of the guarantor.
Why Is PCP & HP Not A Suitable Method Of Financing Your First Car?
PCP stands for Personal Contract Purchase and HP stands for Hire Purchase.
Both of these methods of finance require you to be able to put down a substantial deposit. This is rarely feasible or affordable for first time buyers, potentially with limited funds or access to immediate cash.
Hire purchase agreements are the more straightforward of the two credit options, and they are typically arranged directly with the dealership. This could cut the options available to you for your first car, as you will be unable to get a car from a private buyer if you are planning to use this means of financing as they simply will not be able to offer it. Typically, cars from dealers are also more expensive.
You will also not own the asset until you have paid the final payment. You will also be subject to fees and interest rates, that could be much higher than those available from online direct lenders. Similarly, because you do not own the car, you will be unable to make modifications or changes to the vehicle, including fitting a roof rack.
Personal contract purchase is typically much more suited to people who are in a secure financial position. This is because you will need to pay a substantial deposit for the car. The bigger the deposit, the smaller your monthly repayments could be, but this will be subject to the individual agreement. Moreover, you will need to meet the repayment schedule for a set period of time, usually from three to five years. At the end of this term, you will have the option to trade in the car and upgrade, using the equity you have paid into it. Alternatively, you can pay off the remaining equity in the car in one lump sum. For so many young people, or first time buyers, this will be an extremely expensive method of payment. The monthly payments may look attractive because the bulk of the cost will be asked for at the end of the term.
PCP is more suited to people who wish to regularly change their car. Finally, these two types of financing are better suited to people who want a brand new car (or who can afford it), which might be extremely unrealistic if you are buying your very first car.
Other Costs To Factor Into Your First Car
It’s not just paying for the vehicle itself that is going to be an expense you will need to consider. These are the other important costs you will need to be comfortable with, or include in your budget, to be able to afford the upkeep of your first car.
- Monthly repayments
- Cost of road tax – for eco friendly or low emission vehicles, this might be next to nothing. For old, uneconomical cars, this could be expensive
- Cost of petrol or diesel – evaluate how many miles per gallon for how cost effective the vehicle is
- MOTS and annual services
To help budget and keep the costs down of buying your first car, make sure you use price comparison tools or go direct to a lender that will compare different options suitable for you across the market. Remember, this will not affect your credit score!