Let’s be honest: Cheap car finance does not enjoy the best reputation. Surely, you’ve heard stories about car deals with lots of fine print, sub-par vehicles and disrespectful customer service. On the face of things, there is nothing to suggest that cheap car finance could possibly be great car finance, too.
And yet, at Concept Car Credit, we beg to differ. Here’s why.
Cheap car finance: A recipe for disaster?
First off, though, it’s only fair to admit that cheap car finance can be a recipe for disaster if you don’t watch out. The reason for this comes down to a simple equation: The higher the risk involved in a deal, the higher the rates. This is because in many respects, the rate is considered a premium, in case the buyer is unable to meet his or her obligations.
In most cases, therefore, the better your credit rating, the better your rates. Unfortunately, for most of us with non-picture-perfect credit ratings, this means having to cough up extremely high fees. Cheap car finance therefore should always be approached with utmost care.
Cheap car finance: What to watch out for
Still, some dealers claim to be able to offer you cheap car finance without taking your credit rating into consideration. If this sounds too good to be true, it very often is.
Typically, cheap car finance is bought at the expense of important securities or service – or, what’s even worse, at the cost of the quality of the actual car. So even if the rate may sound attractive at first sight, this very rarely translates into a good deal.
On the contrary: As soon as repairs and maintenance costs start piling up, you may come to regret opting for a seemingly cheap deal.
What about my Credit History?
Usually, the logic behind a cheap car loan is simple: Good terms are the result of a good credit history. This puts cheap car finance outside the reach of most UK households.
To allow more drivers to buy a car again, the market has thankfully diversified over the past years. One of the developments has been to stop treating a traditional credit check as the only yardstick. This is a good idea, since there are more sensible measuring sticks, like the debt-to-income ratio. While your credit score will include even the most inconsequential financial offence, the debt-to-income ratio is actually a useful and highly practical tool to gauge whether or not you’ll be able to deliver on your repayments.
A pre-approved loan is another alternative to the traditional loan. During the pre-approval process, the lender will verify some basic facts about your financial situation. Only after these have been confirmed will they actually apply for a loan.
The benefit of the pre-approved loan are clear: It is more efficient and prevents you from making too many loan applications that you won’t be able to meet anyway. No wonder online publication The Balance calls it ‘a smart move’.
On the other hand, the pre-approval process doesn’t fundamentally ensure cheap car finance. It just makes the application less cumbersome. And it won’t make the credit check as such magically disappear.
Let’s therefore now turn towards the options at your disposal to get the best possible loan for your new vehicle.
Car Financing Option 1: Personal Loan
Obviously, the most straight-forward method is to simply apply for a personal loan with your banks or credit unions. The personal loan may by now have been overtaken in popularity by PCPs. But it is still a perfectly fine approach to buying a car.
What’s more, while PCPs are mostly restricted to new vehicles, a personal loan can also be used for a second-hand car.
Applying for a personal loan can be a good idea if you have a decent credit score and a well-paying and permanent job. A finance company will be inclined to offer competetive rates for secure customers, after all. Unsecured personal loans, however, are not quite as attractive if you’re a less perfect customer: “Generally, unsecured loans have higher interest rates than comparable secured loans with collateral attached,” Investopedia writes, “Unsecured personal loans also come with much more stringent approval requirements, so you’ll want excellent credit on your side. If yours is in poor shape, a personal loan might not be an option – that is, until you can strengthen it.”
A personal loan therefore mainly makes sense to get a benchmark – and to then continue shopping for something more suitable.
Car Financing Option 2: Credit Card
Buying a car by credit card still sounds somewhat disturbing. But it is not quite as absurd as it may appear at first.
For one, credit card interest rates can be quite appealing. More importantly, buying by credit card gives you another layer of customer protection. This can come in handy in case of an argument with the dealer.
At least right now, however, credit card rates do tend to be higher than those of a personal loan or in-house financing. And precisely because of the added buyer protection, many lenders don’t even allow credit card purchases.
According to Million Mile Secrets, there is a simple rule about buying a car by credit card: “If you don’t have enough cash to pay in full for the car, buying the car with a credit card is a terrible idea for you! Because any miles & points you earn will be negated by the interest you’ll accrue on the purchase.”
For the moment, therefore, credit cards must be considered a last resort rather than a recommendation.
Car Financing Option 3: In-house Financing
When it comes to cheap car finance, many car buyers assume that you can only apply for an auto loan with your car dealership for a factory new vehicle. In fact, dealers can get you a cheap car loan even for a used mode.
This option, either referred to as In-house financing or Buy-Here-Pay-Here does not enjoy the best of reputations. This seems somewhat unfair. Just because the dealer has an interest in selling you a car loan doesn’t mean that you’ll get ripped of every time.
In fact, your car dealership can often get a much better rate with a finance company than you could – including credit unions. And you don’t need to have a trade-in vehicle either. Autotrader comments:
“One is that automakers sometimes offer very low rates — including 0 percent — as part of a promotion. While that’s usually only true on new cars, it’s a rate that your bank won’t match. Dealers also shop your credit profile around to several banks. That means some offers may be lower than others — even lower than your bank’s.”
This is why you should definitely give in-house financing a chance.
Car Financing Option 4: PCPs
Just about a decade ago, personal loans where the go-to approach if you wanted to buy a car. Since then, Personal Contract Purchase has taken the car industry by storm.
PCPs offer affordable monthly instalments even for car buyers with a weak credit score. They have put thousands of financially struggling people behind the wheel again. And they have strengthened the position of dealers against bank-type lenders.
A pcp deal is simple, really. You initially only drive the car for a period of three years. The dealer estimates the residual value at the end of that period – this is called the balloon payment – and then calculates monthly payments based on that value. In a sense, you’re only paying off the depreciation.
If you want to keep the car, you pay the balloon payment and drive away. If you do not want to keep the car, you move on to a different model and a new three year period commences. It’s a bit like a mobile phone contract.
PCPs have been a godsend for many households, but they are not without their problems. The biggest of these is the fact that they lock you into a cycle of constantly renewing contracts. Unless you can or want to cough up the balloon payment at some point, you can not switch to a different car dealer.
Car Financing Option 5: Leasing
Car leasing is actually very similar to a Personal Contract Plan, with a small difference. Although you can technically buy a car at the end of the contract, this is not really the point.
Car leasing means renting a vehicle rather than buying it. It is about being able to switch models regularly and to always enjoy that unique smell that only a new car can give you.
These benefits come at a price. Car leasing may not have the highest monthly instalments. But on a permanent basis, it is consistently more expensive than any other auto loan.
You also need to know very precisely how much you are going to drive. If you get the mileage wrong when setting up the contract, you risk paying a hefty fine at the end of the lease.
Unless second hand car leasing takes off in a big way, it therefore does not come highly recommended.
Car Financing Option 6: Peer-to-peer loans
Peer-to-peer loans have been around for a few years. Today, many consider them a viable alternative to a car loan.
With peer-to-peer loans, you finance the purchase price through an online website and a consortium of mostly anonymous lenders. They will usually be more open to risky transactions – i.e. a less than perfect credit history – and can be more lenient in terms of the repayment period.
One of the great advantages of P2P lending, as the Balance writes is that they are unsecured, which means “that a lender cannot repossess your vehicle if you fail to make your payments on time.”
On the other hand, peer-to-peer loans are usually a lot more expensive than personal loans, especially if your credit rating is low. Simply put, lenders want to get a better return than what’s currently available on the market. This, then, is not a cheap car loan, although the conditions can potentially make up for that.
Factors to consider
It’s perfectly natural to feel uncertain about which method to use and what factors to take into consideration. All across the UK, car buyers are struggling with the question of how to get car finance deals that are both cheap and fair.
Generally speaking, if you want to keep your monthly payments as low as possibe, choose in-house financing. Dealers can be extremely flexible when it comes to the condition of their car finance deals and will try to accommodate your needs.
If you’re after the lowest possible overall repayments, PCPs and in-house financing take the cake – depending, of course, on your financial situation.
Other factors to consider are:
- Purchase price. This doesn’t just mean shopping around for the best price for a particular model. But also considering a cheaper car to begin with.
- New versus second hand. PCPs can be very cheap. But ultimately, nothing beats a used car in great shape.
- The lender’s attitude towards a poor credit rating.
If you want to go through the numbers, try our car finance calculator. It will allow you to test a few combinations of interest rates and monthly payments to see what’s most feasible for you.
Car finance at CCC
At Concept Car Credit, we approach the ideal of cheap car finance from a different angle. When entering our showroom, you’ll feel just like entering a high-class car dealer. We don’t offer outdated models and we never even consider selling you cars we wouldn’t want to drive ourselves. Instead, we test amd service all of our vehicles to make them look as new. You’ll definitely leave our showroom with a car you can be proud of.
Bad rating? No problem!
In addition to this strict quality focus, we will also offer you an excellent rate even if you’ve run into financial difficulties in the past. We know that damages to your credit rating need not have been your fault and that it would be more than unfair to punish you for them. Which is also why our service is up to par with the very best. At CCC, you’re always a first class customer.
There may be cheaper deals out there on paper. But once you do the maths, these rarely ever work out the way you hoped. So if you want your cheap car finance to truly be great finance, it’s about time you paid us a visit. We’re looking forward to it already!