This article tells you all you need to know about car loans. From how to get them, to what they cost and even what bad credit options are out there! – we’ve got all the info you need.
When you need a car and you need it fast, it can be stressful. Your savings don’t cut it and you’re in desperate need of some transport. Be it for work or just everyday life, if a car is essential to your world, it can be frustrating when your finances don’t match up to purchase one. However, there are many ways to land yourself a loan, especially for a car. All you need is a little know how, and to look in the right places. The right lender is out there, you just need to decide if it’s right for you. Good credit, bad credit – there are loan options available for everyone. Covering everything from car loans for people with bad credit, to those with good credit.
Types of Loans
The way to secure yourself a loan, is to understand what type of loan you should be looking for. There are two different categories of loans available – unsecure and secure loans. The difference between the both is that secure loans are secured by your property or possessions, as collateral for repayment of the loan. Unsecure loans are for smaller amounts, and therefore do not require possessions or property to be put up against the loan.
Personal loans, are usually unsecure loans, but some loans vary dependent on the lender. Like any loan, personal loans have interest rates and are repayable over a set period by a bank or other alternate lender. Whilst you can look into car finance, personal loans are becoming increasingly popular as you actually own the car straight away. Car finance is leasing over a set period, and when the car is fully paid off, you own it. Many people prefer to own their car, in the case they need to sell it because they cannot afford it anymore. Unlike car finance, you’re not tied to a contract for your car.
Buying Your Car
After you’ve found your ideal vehicle, and found out how much it costs, now is the time to see how much you need to borrow. Remember, taking out a loan you cannot afford to repay can cause serious money problems. So, it’s important to consider what you can afford to pay back, rather than the dream car you want. With your personal loan, you’ll be able to walk into any dealership and purchase your desired car within your budget. But, it’s important to understand the interest rates that come as part of your loan costs. Whilst it would be ideal to borrow money and repay exactly what you borrowed, this is the real world. Lenders and banks aren’t giving out money to be kind, they’re doing it for a profit. The interest they put on top of your loan is how they make money on their initial pay out. For them, it’s an investment. Personal loans are usually paid back over short to mid term periods, so they’re not out of pocket for too long. This means that personal loans are usually for smaller amounts. Still enough to buy a car, but not enough for a house (mortgages are secured loans).
Interest rates offered on personal loans are entirely based on your credit history. Your credit score or history, is your financial footprint. It’s a collection of every payment on a bill, credit card and loan you’ve ever taken out. It’s measured by how effective you are at paying back bills and payments etc. on time. If you’ve never owned a credit card, loan or never paid a bill with your name on, your credit score is more than likely no existent. If this is the case, effectively, you have no credit score or history. Which is just as bad as having poor credit.
Your credit score allows lenders to judge what kind of borrower you are. Are you going to meet their monthly payments? Will the loan be returned in full on time? Factors like this weigh in to how much interest is put on top of your loan request. Banks and traditional lending companies usually offer the best rates, for those with good credit. Then, there are guarantor loans, designed for those with bad credit. These types of loans usually have more expensive APRs but nowhere compared to other lending alternatives. Finally, payday loans are some of the most expensive loans you could come across. Sometimes, the representative APR can be around 1000%. Not ideal if you’re looking for a car at a fair price.
Usually payday loans are for smaller amounts, but are still very costly to take out. The lure is that they pay out, fast. But the costs behind them are not worth it. They are repayable over short terms, meaning that you’ll have to cough up the cash, fast. Otherwise, charges will keep increasing and increasing so far, that you could wind up in debt.
Middle of the field, guarantor loans not only pay out fast but have considerably lower interest rates than payday loans. Whilst the interest rates are around 40-50%, which is not ideal, they are one of the best methods for those with bad credit to borrow money. Typically, they are repaid over a longer period, which makes them more affordable.
Bad Credit Lending Options
For those with bad credit, it may seem like there’s not a lot of options open to you in the loan market. Banks and traditional lenders will not offer you a fair rate on a loan, and some will even outright deny your application if your credit score isn’t great. But, alternate lending options (like payday or guarantor loans) are specifically designed for those with bad credit. Like payday loans, they do not consider your credit score before granting you a loan. They emulate a lending style that was around before the creation of digitised credit scores, where you only needed to provide a guarantor with your application to assure that the loan would be repaid.
Guarantor loans are now a little different, but still rely on the same principles. When applying for a guarantor loan, you’ll need to provide a friend or family member to support your application – pretty much anyone can be a guarantor. They must be between the ages of 18-78, have good credit and be a UK homeowner. For your application, they must co-sign to agree that should you fail to meet monthly payments on the loan, they will cover the payments for you. Guarantors are contacted as a last resort for repayment, as most companies aim to set up a manageable payment scheme with the borrower. However, to avoid being unable to make repayments, you should only take out a loan you can afford to repay – so, think about what car is in your budget before you take out a huge loan.
Example Interest Rates
For this section of the article, we’re going to look at lending options for those with good and bad credit. For good credit, we’ll be looking at reasonable loan rates that are available – finding an average rate on a personal loan. For bad credit, we’ll be looking at the average rate of guarantor loans available on the current market.
Let’s take a typical car cost, say £6,000, and apply both the average rate of good credit personal loans, and bad credit guarantor loans too. Both loans will be repayable over a 3-year period, but with varying interest rates for different loan types.
- Good Credit Loans – you’ll have to factor in a deposit from your savings to qualify for a personal loan (around 10%). So, an initial £600 for the deposit, with around 5% APR, paid back over 3 years. You’d be paying back £179.53 a month, and the total amount would add up to around £6,462.95. The interest you’d pay would be £462.95 on your initial £6000 loan. This is only if you have a good credit score (interest rate is an average, and not representative of any interest available).
- Bad Credit Loans – guarantor loans require no deposit and have no upfront fees or charges. Keep in mind that these loans are some of the fairest loans you can get with a bad credit score. Borrowing £6,000 at around 48.9% APR is not as cheap however. The interest over 3 years means you’d be paying £4,452.16 interest on your loan. With monthly payments at around £290.34. In comparison, this is not as desirable as a good credit loan, if you have bad credit, this may be the fairest option available.
Pros and Cons
Whilst both loans have their charms and drawbacks it all comes down to your credit. Unfortunately, if you have good credit you’ll receive a fairer rate on a loan, and even a credit card. But, for those with bad credit, the lending options aren’t there. Sometimes, you have to go with the best offer for your situation. However, taking out a costly loan should be thought about, in great detail. If you take out a loan you can’t afford, you could end up in debt. So, think, is it worth the risks? However, the cheaper the car, the cheaper the loan you need and therefore, the less interest you’ll pay. Keep in mind that you can use a personal loan for used cars too.
Improving your Credit
The one plus side to a bad credit, guarantor loan is that you can actually improve your credit with it. By repaying the loan on time, meeting the monthly payments, you can slowly rebuild your credit score. So, whilst it is an investment, it’s one that can improve your credit, so your loan rates are better in the future. What else can improve your credit? Well, paying a bill with your name listed on it can help. As well as paying off a loan, if your name is on household or mobile contract bills, and you pay these on time without delay, your credit can slowly improve.
Robert Smoker, the CEO of TFS Loans, has an extensive work history within the finance sector. Having worked with a prestigious Private UK bank for over 36 years, Robert has had many head and executive financial roles under his belt since the late 70s. His extensive knowledge of the financial and loans sector carries into his writing, creating content for financial blogs and more.