5 Questions to Ask Yourself Before Taking Out a Car Loan

Are you looking to get a car loan for the first time? Have you chosen the wrong finance agreement in the past? If you feel you’re in this position and want to make sure a car loan is right for you, the guide below looks at the top 5 question you should ask yourself before taking out a car loan. Before you can secure a car loan, you will need to receive an approval from a reputable car finance lender. Not every person who applies for a car loan will be eligible for finance and your personal circumstances such as affordability, creditworthiness or job security may even see you decline a car loan.

Can I afford finance?

The first thing you should consider is if you can afford to take out a car loan or not. The best way to do this is to look at your current outgoing payments and incoming wage and how much you could comfortably put towards a monthly payment for finance. Finance deals can last between 3-5 years so it’s important you can meet each and very monthly instalment. You can use a car loan calculator to see how much you could afford to borrow before you apply or as a general rule, you should never spend more than 10% of your monthly wage on a  car payment.

Is my credit good enough?

It can be possible to get a car loan when you have a low credit score, but it does make it harder and limit your options. You should always check where you fall on the credit scale before you start making applications for finance and if your credit is low, work to rebuild it first. Finance lenders tend to favour people with better credit as they are less of a risk and usually have long history of being able to handle their past credit responsibly. Building your credit may help you to get a lower instead rate and have more finance options available to you.

Will my situation change in the near future?

As we have quickly mentioned above, usually car loans will last between 3-5 years or longer. This means you will need to meet each and every payment over the duration of the loan. There are a number of life changes such as redundancy or illness which may make it harder for you to pay your loan back if you no longer have a steady income. If your finance deal is Hire Purchase or PCP, the lender owns the car during the agreement and can take the car off you if they don’t get their money back.

Do I want to own the car?

Some finance agreements such as Hire Purchase and Personal Contract Purchase are secured loans which means the lender buys the car on your behalf from the dealer and will own the car during the agreement. This can be a good idea for people who don’t want to own the car or want to change their car more often. A personal car loan is unsecured and instead the lender deposit your agreed amount into your bank account and lets you buy the car you want like a cash buyer. This means you will be buying the car outright and will be the legal owner of the car from the start. Comparing different car finance agreements can help you to find the one that fits you best.

Can I afford a deposit?

Personal loans don’t require a deposit but car finance deals like PCP and HP may require you to have a deposit to put down at the start of the deal. Hire purchase agreements can even require you to put down 10% of the value of the car at the start so it’s worth keeping in mind. There are many agreements which don’t need a deposit but having one can help to reduce your monthly payments and even get you a lower car loan rate offered.