Car finance – do’s and don’ts of buying your first car

Brits are being warned about the complexities of purchasing a car on finance, after a watchdog revealed that millions of drivers could be entitled to compensation.

An investigation into car finance mis-selling by the Financial Conduct Authority (FCA) found that some customers may have been overcharged on loans taken before January 2021.*

Car finance allows drivers to spread the cost of purchasing a vehicle into monthly payments, instead of paying it all upfront in one go.  Today, 80-90% of cars are being purchased through finance agreements – making up a staggering two million cars per year** – so it’s important motorists are aware of the red flags to avoid, potential hidden fees and the Ts and Cs they are signing up to.  

Car insurance experts from Quotezone.co.uk are providing some useful tips to help give young motorists or those buying a car for the first time, a better understanding of what to look out for when purchasing a car on finance.

It’s crucial that motorists check out any hidden costs and fine print which may catch them out. Lenders may attempt to upsell additional products, so it’s important for drivers to consider what will be beneficial for them.

Taking out finance that doesn’t align with the driver’s personal financial situation could negatively impact their credit score – it’s always essential to make sure the repayments are affordable.

The contract length is also an important factor to consider, as while monthly repayments may be low, the accumulation of interest could increase the overall loan cost.

Greg Wilson, car finance expert and CEO at Quotezone.co.uk has highlighted the importance of carefully reviewing the details of car finance deals moving forward.

He said: “In January 2021, following concerns that brokers’ earnings were linked to the interest rates charged to customers, FCA introduced new rules regarding car finance. 

“The flaws in the previous rules led to higher finance costs for consumers and created a potential conflict of interest.

“It is vital that drivers choose the right plan to suit their individual circumstances. We wanted to help young drivers and those looking to buy a car for the first time by researching the common pitfalls to look out for when signing up to a car finance agreement.

“Choosing the right plan can be tricky and if drivers are in any doubt what’s best for their situation, they should seek advice from a financial expert.

“Car finance can help drivers improve their credit score – building a credit record and demonstrating responsibility to banks and lenders when payments are met on time each month.  It also gives drivers more manageable monthly payments and the option to purchase a newer car, which is potentially easier to maintain and is less likely to need repairs.”

Motorists looking to purchase vehicles on finance should be aware and consider these eight things:

1.The impact on your credit score

Before taking out any loan, including car finance, you should ensure that you can make the repayments, as failing to do so could affect your credit score. A poor credit score could impact your ability to secure future vehicle finance and have a knock-on effect throughout other areas of your life, such as your ability to get a mortgage.

2.Choose the right plan for you

There are four types of car finance to consider, each with its own advantages and disadvantages.

• Hire purchase (HP) is a straightforward option where you make monthly payments, and the vehicle becomes yours at the end of the term.
• Personal contract hire (PCH), a leasing option where you essentially rent the car for a set period, with no option to purchase it at the end.
• Personal contract purchases (PCP) are similar to PCH, but with the option to buy the car at the end of the contract.
• You could also take out a personal loan to buy the car outright and then pay back your loan lender directly, without the need for a car finance agreement.

3.Be aware of PCP costs

As time passes, the value of your vehicle will decrease. With a PCP agreement, you may be required to make a balloon payment at the end of the term. This payment can often be higher than the car’s current value, leaving you paying more than the car is worth. Be sure to factor this into your budget when considering a PCP deal.

4.Watch out for hidden fees

Admin charges, early repayment fees, and excess mileage charges can significantly increase the total cost of car finance. Lenders may also attempt to upsell additional products like insurance or maintenance packages, so carefully consider whether they are beneficial or necessary for you.  Note you may need to have insurance in place before the contract begins so be sure to ask for more information.

5.Avoid buying a car with outstanding finance

If the car you’re considering has outstanding finance, you could be liable for any remaining debt. If the original finance agreement hasn’t been fully paid off and the lender cannot recover the remaining balance, the car could be repossessed. Always ensure that the seller has cleared any outstanding debts before proceeding with the purchase.  You can look up an online motor checking service to double check any outstanding finance before you make your decision.

6.Check the annual percentage rate (APR)

The APR can vary depending on your credit score and the lender, so be sure to compare APRs across different finance options to ensure you’re getting the best deal and note there may be a time limit on the initial percentage so always review the details carefully.

7.Consider contract length

The longer your contract is, the lower your monthly payments may be, but this can also result in paying more interest over time. Ensure the contract length aligns with your financial situation and long-term plans.

8. Review deposit options

Some agreements have deposit-free options but be wary of how that will affect your monthly payments and your overall interest charges, as they may be higher if you’re not paying a sum up front.

For young drivers who may not have a credit score yet,  Quotezone has bespoke options available to help them, such as young driver car finance and student car finance.

References:
*https://www.which.co.uk/news/article/car-finance-fca-investigation-what-you-need-to-know-a4eXb5u8VeBy
**https://www.bbc.co.uk/news/articles/cp3z9l3q5zeo#