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How to best apply for a car loan – don’t make these mistakes!

How to best apply for a car loan – don’t make these mistakes!

2 August 2022 Concept Car

Are you about to apply for a car loan? Worried you may not be successful? Imagine the following scenario for a second:

You walk into a dealership. Your gait is confident, there’s a smile on your face and you’re walking straight towards the sales person. You can see she’s not used to this level of self-assuredness and getting a little nervous. You point at the car you want and say: “This one.” And then, you do the unthinkable: You pull out your purse from your pocket and remove from it the exact required amount of Pound bills. As you drive away from the lot a few minutes later, you think to yourself: “I know I have an important meeting in half an hour. But it can wait. Why don’t I take this beauty for a ride?”

Sounds like a dream?

We’re not going to lie: It’s probably going to stay a dream forever. Most of us are having a hard time getting car finance at all, let alone paying for it in cash.

What’s more, as reported by personal finance website Credit Karma, the average purchase price for new vehicles has been on the rise for years. So the prospect of ever paying for a car like you would for your groceries is not exactly becoming more realistic.

Still, it’s not the end of the world. There may only be a handful of people driving around in Porsches or Bugattis. But that doesn’t mean you can’t have fun with a Fiesta or a Polo, too.

In this special, we’ll show you how best to apply for a car loan. We’ll go into all the guidelines and discuss how you can improve your chances of approval.

It may not make your dreams come true. But it can come pretty close.

Over rated: Checking for prices

One of the most common pieces of advice when it comes to car loans is to minutely scour the market for offers.

Granted, this has become easier than ever. There are still plenty of dealerships within driving distance. In fact, there may be more than ever. Add to that the number of offers available on online platforms and you’ve got a pretty big pool of options to choose from.

At the same time, there are two important things you need to understand:

The great offers these companies are aggressively pushing are usually reserved for their best customers, i.e. those with a perfect credit rating.
Special offers like 0% deals tend to have a restricted running time of a few months. After that, the APR will be much higher.
Great deals usually mean tighter conditions. So you may have to pay back the money in a shorter amount of time, which means higher monthly instalments. Not a problem if you have the money available. But for most, this merely serves to increase chances of a default.

This doesn’t mean you shouldn’t compare prices. You absolutely should. What it does mean is that if your financial position is weak, you should focus on lenders specialising in car loans for bad credit. These will take your volatile position into account and offer you loans which are more expensive but easier to pay back.

Sounds strange? We’ll get back to this a little later.

What about alternative financing models?

When we’re talking about car finance, we’re referring to a traditional loan. Meaning: You pay back all instalments of a loan down to the last penny. And then the car is yours.

This used to be the only way to buy a car if you couldn’t afford to pay in cash. Today, it is merely one among many options at your disposal.

The most popular financing model on the market at this moment is actually a so-called PCP. These personal contract plans have the advantage of low monthly payments and usually long running times. They’re therefore very affordable and can help even the finanically weak afford a pretty great car.

On the downside, if you actually want to own the car, you will need to make a huge final payment at the end of the term. Most people can’t afford that, so they return the car and instead enter a new contract for a different car. PCPs therefore tend to lock you in for quite some time.

Hire Contract Plans are similar to more traditional loans. As Which? explains:

“This is secured against the vehicle itself and you do not own the car until you have made the final payment – you can’t sell it without the lender’s permission, although you can return it. You typically pay a deposit (often 10%) and then repay the balance in instalments, plus interest, over the loan period.”

If you miss a single payment, however, you risk loosing the car. And since both HPs and PCPs are usually reserved for new cars only, they are still more expensive than a decent used car deal.

Car loan: General strategy

From our point of view, the best you can do is always to buy second hand. Not every used car deal is perfect. Not every used car is cheap. But in the end, on average, it is going to offer you the best value for your money and the best chances of a succesful application.

In the following sections we’ll detail some of the general steps everyone should take when applying for a car loan. You’ll find these useful regardless whether you have a bad or a decent credit rating.

After that, we’ll dive a little deeper into the special situation for those with a bad credit rating. Those deals require a little more work and patience and therefore deserve a separate section.

Step 1: Check your credit

Before you even think about applying for finance, you need to know where you stand. This is so perfectly logical you’d assume we needn’t even mention it. And yet, every year, in the UK, many drivers apply for a loan as if they’re buying a lottery ticket.

There are three problems with this:

  1. You risk getting rejected for the loan. As a result, your rating may take an even deeper fall.
  2. You deprive yourself of the opportunity of first improving your credit score.
  3. Even if you do get a deal, it will certainly be more expensive and have less favourable terms in general.

Which means you absolutely need to verify your current score. Especially since you’re entitled to a free credit check each year from one of the UK’s three leading rating agencies: Experian, TransUnion and Equifax.

So find out your rating from each of them – which may differ drastically! – and only then plan your next steps.

Step 2: Determine how much you can afford

Your credit rating is never the full story, of course. Really, it only tells you how well you’ve paid back your debt in the past. Sometimes, these events date back up to seven years. Which means it doesn’t really reveal anything substantial about your current financial situation (which may well be a lot better). Also, it doesn’t mean you were ever broke or low on money. It may merely be that you were sloppy with regards to your loan payments.

Regardless, you’ll need to determine how much, exactly, you can spend on a new car. You need to know what you can afford to pay per month, what kind of downpayment you can make and for how long you can commit to make these payments.

So, ideally using a car loan calculator, work out the best ratio of these factors for you personally. You’ll be surprised how many reasonable options there are. You’ll also discover that a lot of expert advice just won’t work for you. No need to worry about that. Just go your own way and do what’s best for you.

Step 3: Consider total monthly costs

Once you know how much you can afford, you can potentially start looking for lenders. We just thought we’d mention that, when looking at an offer, you can’t just factor in the purchase price of the car.

In fact, this would be the first step towards financial ruin for most.

When buying a car, the monthly loan instalments will typically be the most significant source of costs. But there are more:

  • Petrol costs.
  • Potential repair costs.
  • Depreciation (as a loss of future income when selling the car).
  • Road Tax. (VAT)
  • Check up costs, including MOT.
  • Car insurance.

Add this to your monthly loan payment and THEN decide if you can afford the deal or not.

Step 4: Apply with multiple lenders?

These days, applying for a car loan has become a lot more interesting than it used to be. It has also become a lot more complex.

There’s the traditional loan with a bank, credit union and dealership. Then, there are the three big alternative options – PCP, HP and leasing. Finally, you can also try your luck with an online lender, payday lenders or borrow from friends and family.

Thanks to the easy procedure of online car finance, you can apply for tens of different loans in the matter of minutes. On our website, too, all you need to do is fill out our contact form and we’ll get in touch with you. You could be driving away with your new car the very same day.

But is it wise to blindly send out as many applications as you can? For one, not all lending options are equal. Payday lenders should be a big no-no. Online lenders sound great in theory, but are pretty unrealistic in practise. And, as we’ve mentioned, PCPs and HPs have at least as many drawbacks as they have benefits.

And should you apply and the lender carries out a hard credit check, your credit rating will take a tumble.

All of this should not scare you off from making a loan application. But do be careful about whom to apply with. Create a top 3 of potential lenders and then talk to them on the phone, if possible, to assess your chances before making any hard credit checks. Your credit score will thank you for it.

Step 5: Use your loan offer as your budget

We often think of credit applications as tedious and stressful. Which they undeniably are. But they can also be something else: useful.

Ultimately, it is very hard for you to determine how much money you can safely borrow. Usually, you will be biased towards thinking your credit status is stronger than it actually is. In practise, however, banks and dealers have a lot more experience in these matters. They should be able to assess your position much more precisely.

One smart way of working with lenders is to use their offer as a gauge of your creditworthiness.

So, instead of complaining about their offer, simply set the amount as your budget and see how much car you can buy with it.

This often cited piece of expert advice is precisely how we’ve been working at Concept Car Credit right from the start. First, we work out how much we can lend you and what the best repayment plan for you looks like. Then, we show you all the incredible cars you can get for that amount.

What may sound frustrating on paper is actually liberating in practise. Plus, it reduces your risk of defaulting on the loan significantly!

Step 6: Get the most our of your trade-in

We just pointed out that you should probably not apply with as many lenders as you possibly can. When it comes to your trade-in, however, we probably need to backtrack on that advice.

Your trade-in is an essential piece of the puzzle. Most people are happy to give away their car almost for free if only they can get a somewhat decent car loan in return. In fact, the better your trade-in, the better your loan will be. This is why, for many dealers, these two components are so intricately linked.

Which means that, whenever possible, get as many offers for your current car as you possibly can. Check with local car dealers, try sites like webuyanycar and their competitors and maybe even check a newspaper ad.

You may find that you’ll get the best deal by selling and buying at the same dealership. Still, it doesn’t hurt to see if you can get an even better offer somewhere else.

Step 7: When to apply

It is pretty clear that it matters where to apply and for how much to apply. But did you also know that it makes a difference when to apply? At least, this holds true if you intend to get your car finance from your dealer.

This may well be one of the most under-rated secrets of the trade. There are a few points during the year when your chances of success are significantly higher than at others:

  • The end of the quarter: This is when sales persons get their bonuses based on the results of the previous three months. Bonuses make up a huge part of their salary. So they’ll rather sell you a car even at a slightly less advantageus rate than not sell you a car at all. (As long as your ratings are good enough, of course!)
  • The end of the year: Some dealers also receive end of year bonuses. So late December is another opportune moment to check for good deals.
  • Wintertime: December is a good idea anyway, since deals tend to be better in the Winter. In Summer, as many studies have shown, people are willing to spend more money on just about anything. They also love the feeling of driving into their holiday in a brand new car (who doesn’t?). In Winter, meanwhile, sales usually slump. This is why applying for a car loan is easier during the cold season.

Step 8: Saving as a habit

In a revelatory article in the New York Times, journalist Kristin Wong came up with an inspiring idea on how to improve your saving habits.

Her concept is based on the premise that we are no longer living in the safety and relative stability of the 70s and 80s anymore. Rather, our lives have become less predictable. We could have the job of our dreams one day and be on the dole the next. Saving up for something, which used to be entirely natural just two decades ago, can today seem unattainable.

A great way of dealing with this conondrum, she argues, is to take a fresh perspective:

“Traditional personal finance advice focuses on saving a lump sum, like eight months’ worth of living expenses, or $1,000 for an emergency fund. But that can be hard to plan when you have an income that fluctuates wildly. It’s better to think of saving as a habit rather than an objective, especially when you have a variable income. […] For example, instead of thinking of your savings as a $5,000 goal, approach it as a habit of saving $100 a week. [Researcher] Rachel Schneider’s research also found that once some savers reached their objective, they did everything they could to keep that amount intact — which sounds great, but can backfire. […] “It’s demoralizing for people when they have to break their savings,” Ms. Schneider said. “The data supports that people are more likely to continue saving if they think of their savings as an ongoing behavior rather than a one-time objective.”

Step 9: Make a down payment

One of the best uses you can put your savings towards is a sizeable down payment. Although it has become quite popular these days for dealers to waive the necessity for a deposit, there are many reasons why you should make one nonetheless.

Firstly, there is no better way to install trust in your financial capacities. A down payment signals to the lender that you are committed to this transaction. It also indicates that you are able to actually deliver.

Secondly, a decent down payment can significantly improve the terms of the deal. Since you’ve already paid off part of the price, the loan will be lower. Thus, you can either bring down the length of the term or reduce the monthly instalments. Both can be of good use to you.

What to do if you have a bad credit rating?

The steps above are important for everyone intending to apply for a car loan. If your credit score is low, however, you’ll need to work a little harder. This is because many lenders won’t even consider applications from anyone with a less than perfect rating.

It is also true because you need to make sure you’re not signing contracts you can’t actually fulfill. After all, just like there are lenders out there who will hardly accept anyone, there are others who will lend to just about anyone. Clearly, that’s not healthy either.

So, in the following sections, we’ve put together some concrete thoughts and practical advice for those with a bad credit rating. All of these steps should ultimately improve your chances of success.

Don’t buy too much car

Most of us are smart enough not to give luxury cars serious consideration. But dreaming about Porsches and Ferraris is not the real danger. What is, is aspiring towards cars that appear to be within your reach, but are actually quite a bit too expensive for your budget.

Take a Volkswagen Golf, for example. It seems like the perfect family car. And you can see thousands of them driving around on our streets. So, clearly, it should be in your ball park, right?

In fact, the 2020 edition of the Golf will set you back around £20,000 according to a new report by Carwow. That’s a lot of money, even for a new car!

Obviously restricting your search to used cars expands your options. Still, you need to be careful not to rush in. Simply follow the advice we gave you above: Determine your budget by analysing how much you can afford and using the lender’s offer as a budget.

Always buy used

We are obviously biased here. After all, we only sell second hand vehicles at Concept Car Credit. Obviously, if we all stopped buying factory new models today, there would soon be no second hand market anymore. Still, we believe there are very good reasons why those with a weak credit rating should only be buying used.

A car’s value takes a dip the moment you drive it off the lot. This is a cliche, but it’s true. Over the first year, its value can shrink by as much as 30% and then by another 10% over the next 24 months.

This isn’t rational. Today’s cars can easily last 15 years or more. And they are still as good as new after three years. This means that you can get an incredible deal for cars which are between 36-60 months old. Also, insurance will be cheaper and loan payments lower. And since depreciation tapers off after about 4-5 years and eventually drops to almost 0 at some point, you may even be able to re-sell your car at a more than decent price.

All of this means that used car deals are by far your best option.

Refinancing / Loan consolidation

If the terms of your loan are dragging you down, why not just improve them? What sounds too good to be true can sometimes be a realistic option.

With a loan consolidation, you combine different loan payments, each with their own interest rates and loan terms, into a single payment. This can be beneficial, if your new lender makes use of this opportunity to bring down the APR for this unified credit.

Refinancing can occur

a) if you have reached the end of the current contract but still need to negotiate a new one.
b) if you can plausibly explain to your lender that there are benefits if they agree to new terms.

Granted, neither option is always possible. But it certainly doesn’t hurt to try.

Improve your credit rating

Obviously, the best way to get a better deal is to turn a bad credit rating into a decent or even a good credit rating. This won’t always be possible. And it is not something you can achieve over night. But just as with saving, it pays to have a little patience here. If possible, hold off on buying that car a tiny bit longer.

It helps to think of this as a continuous process rather than a one-time thing, as a habit just like saving.

Best of all, you can start straight away. Don’t delay. Set up your personal improvement plan right now. To get you started, we have a few helpful recommendations for you.

Improve your Debt to Credit Ratio

Some debt is obvious. If you bought a house, for example, those monthly payments are a constant reminder that you are balancing a heavy financial burden on your shoulders.

Other debt, however, is a lot more subtle. And we all tend to have too much of it.

Most of our current accounts allow us to go into overdrafts. Credit cards work along the same lines. Whether you realise it or not, by making use of them, you are going into debt. Rolling credits and credit cards are, effectively, convenient way of taking up small amounts of debt without having to negotiate a new contract each time.

That doesn’t mean that you’re getting something for free. And if you’re constantly using up the full limit of your possible credit, lenders are sure to interpret this as a sign of fincial weakness.

So, one of the best things you can do to improve your credit score is to bring down your debt to credit ratio. You can do this by …

  • … paying off as much of your credit card and overdraft debt as you can.
  • … no longer taking up as much debt by bringing down your expenditures.
  • … negotiating a higher credit limit. This, too, will reduce your debt to credit ratio. We don’t really advise in favour of this, however, since it may tempt you into taking up even more debt.

Get a credit check subscription

As we mentioned, you can get a free credit check from each credit agency in the UK every twelve months. In most cases, this will be enough. How many cars or houses are you going to buy each year, after all?

If you have a really bad credit rating, however, it may make sense to methodically work towards improving your score. In this case, it can make sense to subscribe to one of the agencies’ websites. This will allow you to monitor your rating constantly and to observe how your actions are influencing the actual score.

What about features like Experian Boost? These claim to instantly improve your credit score by adding a few personal pieces of information to your account. This includes your phone- and utility-bills. Some have reported an immediate 20-point rise in their score.

However, these informations will be marked as ‘self reported’ on your file. Lenders will therefore be able to see that the increase was caused by the use of the Boost tool. Which is why we are sceptical it will actually lead to a greater chance of a successful loan application.

Register on the electoral roll

This little ‘trick’ is often mentioned in articles about credit scores. The great thing is that it is not an urban myth. Registering on the electoral roll can indeed lead to a better credit score. (it’s by no means guaranteed, however)

But why can something so simple be so effective?

The idea behind this is that the electoral roll provides lenders valuable information about your address. If you’ve moved around a lot, they will regard this as a sign that something’s amiss. If, however, you’ve stayed in the same place for a longer time (or if you’ve moved into a more prosperous neighbourhood), they’ll interpret this as a sign of stability.

In general, it will pay off to heed this advice. Plus, it’s very simple and won’t cost you a penny.

Close unused accounts

The more accounts you have, the more debt you can make. More accounts also make it harder to determine how much debt, exactly, you actually have. This is why lenders appreciate a small number of well managed accounts even if there is some debt on them over a plethora of small accounts, each with a different credit utilisation ratio.

Which means that closing all but a few vital accounts can significantly improve your chances of success when applying for a car loan.

Not only that. By closing unused accounts, you can also save costs and create a far more transparent situation for yourself.

Focus on loans with a higher approval chance

Loans are hard to come by. You can blame whomever you want to for this – the economy, banks, car dealers, rising car prices, a general distrust in the future, the manifold financial crises over the past decades. In the end, what matters is that something as seemingly simple as credit has become exceedingly complicated.

We’ve already shown you how you can work towards improving your chances of success. But we also have to stay realistic. Credit ratings don’t change for the better overnight. In fact, they may get worse even if you’re taking steps in the right direction. Agencies can change their guidelines. Lenders can decide to be even more careful when extending credit. The economy can take another turn for the worse,

Although we certainly advise you to work towards a healthier rating, we also recommend focusing on lenders who specialise in bad credit car loans. This is because they will be able to cater to your needs much better than a regular bank can.

Do note that we are not talking about payday lenders here, which are not the right place to turn to for a car loan under any circumstances. Rather, we are talking about respected bad credit car dealers.

They will be able to bring the monthly payments down according to your capacities. They will also be willing to talk about extended loan terms which make it possible to spread the debt out over a longer period. And if things are getting harder for you, they tend to be more understanding.

What to do if you do not have a credit rating at all?

It’s better to have no credit than bad credit, The Balance argue. This is disputable.

After all, with bad credit, your case is clear for the lender. They may actually be willing to take a chance on you. But what they do generally consider important is to know exactly how high their risk is.

This allows them, among others, to work out a suitable interest rate. It also means they can find a good blend between safe and risky loans.

If you don’t have a credit score at all, however, lenders have no idea what they are signing up for. Ironically, even if you have not set a foot wrong, this can mean you won’t be able to apply for car finance with any bank or trade union.

It is a problem many students face. The younger you are, after all, the less big payments you’ve made and the higher the chance that you don’t as yet have a credit- or debit card.

So, what to do?

Thankfully, even with no credit score at all, you can still get a car loan. For one, there are loans aimed specifically at students. Lenders offering them know about the hardships of your situation and have adapted their offers accordingly.

If these are not an option, you will need to take a few steps if you want to apply for a car loan. Here are the most promising ones:

Gather documentation.

The more you can prove that you are a safe bet for the bank or dealer, the better. The Balance mentions a “copy of your bank statement, documentation of any recurring bills such as a utility or phone bill” as well as “proof of employment history — multiple pay stubs should work.”

Open a bank account and build credit using a debit or credit card.

It may sound absurd but to improve your chances of getting money, you first need to spend some! The point, of course, is that if you pay back your debt in time, this will show the lender that you are capable of responsible behaviour.

Save up for a down payment.

We’ve mentioned it before, but we’ll gladly repeat it: The best thing you can do to sway a doubtful lender is to pay a meaningful amount upfront. You may need to ask friends or family for help for this.

Set up direct debit payments for as many of your recurring expenses as possible.

This will prevent you from ever missing a payment, which can harm your credit score in this fragile early phase.

Limit your credit applications.

Just because it’s hard to get a car loan without a credit score, you shouldn’t run wild and apply for one at every possible place. The more hard credit checks you initiate, the worse the effect on your rating will be. Instead, try to restrict your applications and to only opt for soft checks initially.

And that’s it – our ultimate guide on how to best apply for a car loan. We hope you found plenty of inspiration. And if you ever have any questions, we’re here to help. Located in Manchester, Concept Car Credit has already helped thousands of buyers with bad credit. Give us a call or write us a mail – you could be driving home with your new car the same day!

2 August 2022 Concept Car