The Types Of Finance Available
The Comprehensive Guide
The Types Of Finance Available – Chapter 3
3.1 What Car Finance Can I Actually Get?
There are a number of calculations that lenders use when deciding to offer you finance. Your success depends on these.
The first is your Credit Score. This is a record of your previous credit history – any debt you’ve had in the past, any arrears from rent, any county court judgements: it’s all logged and compiled into your score.
If you’ve borrowed or rented in the past and you’ve paid back in good time, your credit score is likely to be good and the world’s your oyster. If you’ve had problems with arrears or late payments in the past – and even if you’ve rarely had any debt for credit agencies to inspect – your score could be poor.
This is the first and most common element that may affect the type of Car Credit you’ll be offered.
It might not be a straight no: it may just change the terms of your finance – increasing the interest cost (the APR) for any finance you’re offered (making the car more expensive overall). But in some cases, such as an unsecured Car Loan from a bank, bad credit means you’re more likely to simply be turned down.
Don’t panic: there are options still available.
Bad Credit?
No problem! We can help.
Guarantor Loans
If your credit score is poor then you might still be able to apply for car finance with a Guarantor Loan. This is a clever arrangement where you ask for a friend, colleague or family member with good credit to guarantee your repayments.
So long as they’re over 21 and can prove that they can cover any loan payments you miss, a Guarantor Loan could put you back in the driving seat.
Joint Purchase
Joint Purchase arrangements might also help when your credit score is rocky. Like a Guarantor Loan, Joint Purchase involves a friend or family member who is happy to help, and has a better score than you do. This removes risk from the lender and makes them happier to give you finance to buy the car.
Unlike a Guarantor loan, you both own the car once the finance is paid off – regardless of who paid the money into the pot. Joint Purchase generally gives you better terms on any finance so you can get a better deal, but you need to keep a good eye on the small print.
Another calculation is the age of the car you’re buying.
In the case of brand new cars there isn’t a problem: if you’ve a good credit score you’ll probably have a good choice of financing options to choose from.
If the car is second-hand and more than 12 years old by the time you’ve paid it off, some of those doors shut again. Here’s why:
PCPs and Leasing arrangements – two of the most common and popular car finance options – calculate your monthly payments (and the dealership/lenders future chances of making a profit) by working out how much your car is worth at the end of the contract. With both Leasing and PCPs the lender can keep the car at the end of the repayment period and sell it on. A particularly old car (generally around 12 years old) is not worth enough to make that option worthwhile.
If you’re looking for a finance deal on an older car, Car Loansand Hire Purchase may be the only choices open to you.
3.2 Why Might I Be Ineligible?
Nobody likes to be told “no”, especially when what you want could change your life for the better.
A car might help you find a job, drive your kids to school, let you commute from a better neighborhood. It might be where you meet your partner or how you travel on holiday.
A car isn’t transport: it’s freedom.
Being told you can’t have a loan or finance to buy the car you need is a heavy blow.
But knowing why you might be turned down is a powerful tool. Knowing why they might say “No” is the first step to changing it into a “Yes”.
Let’s take a look at the reasons behind those “No”s and what you can do to turn it around.
WHAT’S YOUR CREDIT SCORE?
Credit Score
By far the biggest reason that people are turned down for car finance is a poor Credit Score. But what is it and why does it matter?
For a lender, a bank or a car dealership, finance is all about risk. How likely are they to make their money back? How likely are you to miss payments? How likely are they to make a small profit from the loan?
Sounds pretty mercenary, doesn’t it? Welcome to the world of finance.
Your credit score is how they assess the risk they take when they lend you money. It’s a list of all your previous loans, mortgages, rent accounts and other finances and it stretches all the way back. These things are all collected by Credit Agencies who assign you a Score that relates to how risky you are as an investment – the lower the score, the riskier you are. Those agencies then provide this score to the people you want to borrow from.
Why Might your Credit Score be Low?
One of the reasons your score could be low is if you’ve never borrowed any money before. This sounds counter-intuitive, doesn’t it? You can never be in debt if you never owe people money.
But you haven’t any history either. You haven’t anything for the Credit Agency to calculate.
Rent or Mortgage Arrears might also drag your score down, as will any County Court Judgements (CCJs). And if you’ve ever struggled to pay back a Credit Card – by only ever paying back the minimum amount every month, for example, that will have an impact too.
Any failed or underpaid debt will hurt your score.
Credit Score
By far the biggest reason that people are turned down for car finance is a poor Credit Score. But what is it and why does it matter?
For a lender, a bank or a car dealership, finance is all about risk. How likely are they to make their money back? How likely are you to miss payments? How likely are they to make a small profit from the loan?
Sounds pretty mercenary, doesn’t it? Welcome to the world of finance.
Your credit score is how they assess the risk they take when they lend you money. It’s a list of all your previous loans, mortgages, rent accounts and other finances and it stretches all the way back. These things are all collected by Credit Agencies who assign you a Score that relates to how risky you are as an investment – the lower the score, the riskier you are. Those agencies then provide this score to the people you want to borrow from.
Why Might your Credit Score be Low?
One of the reasons your score could be low is if you’ve never borrowed any money before. This sounds counter-intuitive, doesn’t it? You can never be in debt if you never owe people money.
But you haven’t any history either. You haven’t anything for the Credit Agency to calculate.
Rent or Mortgage Arrears might also drag your score down, as will any County Court Judgements (CCJs). And if you’ve ever struggled to pay back a Credit Card – by only ever paying back the minimum amount every month, for example, that will have an impact too.
Any failed or underpaid debt will hurt your score.
Insolvency, IVAs and Bankruptcy
Why Does It Matter?
Any form of insolvency – where you are no longer able to pay your debts and need to seek help – will hammer your Credit Score and make it very difficult to get finance in the future. Again, this isn’t something to feel bad about: life happens, situations change and sometimes we can’t keep up. Relax.
What Can I Do About It?
Any form of insolvency – where you are no longer able to pay your debts and need to seek help – will hammer your Credit Score and make it very difficult to get finance in the future. Again, this isn’t something to feel bad about: life happens, situations change and sometimes we can’t keep up. Relax.
The Age of the Car You Want
Why Does It Matter?
It depends on the type of finance you’re looking for but if the car you’re buying is particularly old then the value of the car at the end of your repayment period might put your lender off.
Cars lose value over time. They age, become less reliable, contain older technology and are generally less attractive to new buyers. Lenders often offer Finance on part of the value of the car, seeking to make the rest back by selling it on. This is what happens with a Lease of a PCP.
If they can’t make money by selling it, they could say no to financing it at all. This generally happens when a car is 12 years old at the end of your agreement.
What Can I Do About It?
If you’re buying a used car, you’re best avoiding finance deals where they look at that final cost. Choose a Hire Purchase or Personal Car Loan to finance your vehicle, or just buy it with your savings, if you can.
There are always options if you need to buy a car. A “No” shouldn’t always be a “No”.
The good news is that “Yes” is actually far more likely than you think.
So if you’re looking for a new or used car and you want to chat about your options, visit ChooseMyCar and see how we can help.
You might not be as ineligible as you thought.