As has been pointed out by experts, when you’re buying a car, you’re really shopping for two products: A vehicle and the financing required to acquire it. And whereas the former part is usually fun and entertaining, the latter tends to be tedious and frustrating.
Car finance is big business. Over the past years, the UK car market has grown considerably in the face of recessions and hardships. This has significantly increased demand for loans and financing options. The diversification of the market has meant that many of those who would formerly not have been able to secure car financing are now behind the wheel again.
But this development comes at a cost.
As we’ll explain in this article, not getting a loan is not the only car finance problem.
Bad credit: The #1 issue with car finance
In fact, right now, the biggest issue may be that too many car buyers are being offered bad credit deals – with potentially disastrous results.
Some of the problems with these agreements include the following:
- Loans that do not take the actual financial possibilities of the buyer into consideration. Some dealers simply hand out cash to anyone who’s applying. This can turn into a serious issue as soon as you can no longer fulfil your monthly obligations.
- Loans that are advertised in a misleading way. Some of the tricks used by sellers include
– mentioning only weekly loan payments (instead of monthly ones),
– offering cars on their website which are not actually on sale in their showroom (to lure you in)
– or drafting contracts that are too complex to understand.
- Finance agreements that work as long as everything’s running smoothly, but fail once something unforeseen happens. A typical problem are high interest rates that can only be paid as long as you have a job or as long as you don’t run into any sudden financial obligations.
Steering clear of the bad deals isn’t easy, however. After all, there are several reasons why serious car finance may not be available to you.
Car Finance Problem #1: Bad Credit Rating
This is easily the most frequent reason why you can not get a car finance deal. Just as with any other lending agreement, the financing house, which can either be a bank or the dealer himself, wants to make sure you can actually afford to pay the loan. Your credit rating is one of the few serious means of documenting your financial means.
Unfortunately, for many, their credit rating is a representation of their financial weaknesses. Even the slightest delay on a payment can send your rating plummeting. And credit ratings know no mercy. Losing your job can result in many missed or reneged payments. It may not have been your fault. But it will affect your creditworthiness nonetheless.
Interestingly enough, having no credit rating can be equally problematic as having a bad one.
This spells trouble for young customers. Many of them do not yet have a rating, which means the lender does not have any information about their financial status.
Often, the only solution lies in getting a guarantor to secure the deal.
Car Finance Problem #2: Job Issues
Timing can be vital when applying for car finance.
What lenders want to see is stability. Being out of employment, still being on probation, being self employed or only working part time are all factors that reduce this sense of stability. They can thus all significantly reduce your chances of getting a loan.
Some problems are obviously bigger than others. As long as you’re earning enough as a part timer, there’s no reason to worry. If you’re still on probation, many financing houses will simply ask you to come back in three months, once you have a long term contract.
For those who are self-employed, the case may be slightly more complicated. Banks never fully trust freelancers, despite the fact that their numbers are increasing and despite the fact that they may actually be among the highest earners. In most cases, however, the issue can be resolved by simply applying a higher annual percentage rate.
Being out of employment is a serious car finance problem, however. In most cases, it is in fact a dealbreaker. This is understandable in a way. However, it can create a vicious circle, if ownership of a vehicle is required to get a job again.
Car Finance Problem #3: Documentation
It may sound absurd, but issues with proper documentation are a major source of car finance problems. Think about it, though: Being able to provide all of the required information is one means of providing the lender with security. Any missing documents can disrupt the fragile trust between you and a bank – and result in failure to secure a deal.
Missing documentation is not the only problem, however. Incorrect documentation can be just as bad. One of the most frequent of them is an unjustly bad credit rating.
Which means you could well be declined a car finance deal although your actual rating would have been good enough!
Wait … didn’t PCPs solve all of that?
These car finance issues were standard fare until roughly five years ago. Then, car dealers started offering a new financing solution: Personal Contract Purchase agreements.
Essentially, these represent a blend between buying and leasing a car. For three years, you are paying a monthly lease. After the term has elapsed, you can then either walk away from the deal, buy the car or get a new one.
PCPs tend to have low monthly rates compared to regular buying agreements. They also don’t typically require a deposit. And they tend to be open to almost anyone. For customers, they seem like the perfect deal.
Unfortunately, there are a few problems with PCPs
When the car market is buoyant, as it seems to be right now, PCPs are indeed an excellent solution. At the beginning of the term, the dealer estimates the value of the car after three years. If the actual value exceeds this number, you can use the difference to get a cash advance on your next car. For many drivers, this has been the case in the recent past.
However, the entire model collapses as soon as used car prices start falling. If this happens, you may neither be able to buy current car or afford the next car and may end up without one.
Another problem many don’t realise when signing a PCP contract: You really are bound to the agreement for the full duration of the term. Which means that if you should want to buy another vehicle during these three years or if you should run into financial difficulties and can no longer afford the loan repayments, you’re in trouble. The dealer is sure to hold you to your obligations. This could effectively send you into insolvency in a worst case scenario.
Now we’ve identified the main problems of car finance, let’s now turn towards some of the possible solutions.
Car Finance Solution: Search Online
It almost goes without saying that your research should include as many sources and resources as possible. Visiting a handful of dealers is better than merely visiting the one closest to your home. Including online platforms into your search is better than just visiting physical retail spaces (and vice versa for that matter).
The online market place has become a serious competitor to traditional banking. Make sure to reap its benefits. Many dealers have long started to include digital showrooms. This is the best of both worlds: You can pre-select a vehicle at home, apply for finance by email and then visit the dealership to actually see the car for real and clinch the deal.
Car Finance Solution: Be Realistic
Car finance doesn’t just fall through because your credit rating is bad or because you can not provide proper documentation. You can also run into trouble simply by choosing to buy a car that is out of your league. By thinking clearly about what you need and do not need ahead of searching for a car, you can avoid many of these problems. This also includes being realistic about what extras you really require. A great-sounding speaker system, for example, may be tempting, but is hardly a ‘must’.
Banks can also be hesitant about financing cars that are obviously only ‘for fun’. Applying for an expensive sports car when your job suggests you would be better off with a more business-like model, is a sure way to get denied.
Car Finance Solution: Improve your Credit Rating
As we’ve mentioned before, a bad credit rating is probably the #1 car finance problem. Which means that all of your efforts should go into improving it.
What you can do:
- Get a credit card to pay for all of your future expenses. Don’t miss a single payment, never be late. This can significantly improve your rating within months.
- Pay off all existing debt as quickly as possible. Admittedly, this may not always be possible. But every bit helps.
- Wait until making any larger investments until after applying for car finance. The last thing you need right now are new financial burdens.
- Check your credit rating for mistakes regularly. You really want to make sure you’re not failing to get a loan because of a mistake your bank made.
Car Finance Solution: Be Prepared
Many potential car buyers underestimate the importance of the conversation with your bank or dealer when applying for a finance deal. Although hard facts usually speak more than a thousand words, the right words can mend bad numbers, too.
In practise, this means that you should come to the financing negotiations as prepared as possible. If there are any holes in your documentation, you should be able to explain them and fill up the missing information verbally. If your credit rating is lacking, you should be able to provide convincing reasons why this is not a problem and what you are going to do about it.
Most of all, you should be able to present yourself as a reliable person who can be trusted upon to meet their loan obligations without fail.
Car Finance Solution: Find the Right Dealer
Many experts recommend always getting finance through an independent financing house. But this is actually not ideal advice. Often, dealers really are the best place to get a good deal, because they can get better terms with the bank.
What does matter, however, is finding the right dealer.
Transparency is one of the most important aspects here. This includes how digital and physical sales are interacting – can you be sure that the car on their website is really available in their showroom? Can you trust that the price given online is also the price at their shop?
Clear and simple deals are another vital point. The easier it is to get a finance deal, the better. At Concept Car Credit, for example, you simply fill out our application form and we’ll have a response for you within a few hours. As experts in used car finance, chances are good that you’ll be back behind the wheel in no time.
If you’re in the right hands, then the financial part of the equation need not be a problem at all.