Looking to get a car loan to spread the cost of your new set of wheels? Read on to find out how car loans work and how to make sure you are getting the best deal.
That shiny new set of wheels doesn’t come cheap. Unsurprisingly, one of the most common reasons for getting a loan is to pay for a new car.
A car loan is a personal loan you take out specifically to pay for a new or used car. It allows you to split your car’s cost into monthly instalments instead of paying the full price upfront. If you would rather own your car, instead of leasing it then getting a loan might be the way to go. (You can read our article to find out more about the pros and cons of different types of car finance).
Here’s how the process works:
Step 1. Choose your car
This will give you an idea of how much you’ll need to borrow. Most car dealers ask for a deposit, with the rest due when you collect the car. Depending on your financial situation, you have two options:
- Pay the deposit out of your own savings and borrow the rest; or
- Borrow the full amount.
Step 2. Apply for a car loan
You can apply for a loan at any bank, building society or independent loan provider. Your lender will then make a decision based on the information you provide in your application.
Different providers are in competition with each other. If you shop around, you can often find a great deal. Log in to ClearScore to check out loans selected for specifically for you.
Tips for getting a good deal on your car loan:
Check what interest rate you’ll actually be getting.
Lenders usually charge different interest rates depending on the amount. Smaller loans tend to have a higher interest rate, whilst larger loans attract lower rates. As a result, the representative APR differs depending on the size of the loan. When comparing the representative APR offered by different lenders, always make sure it’s what’s offered on the amount you want to borrow.
Check your eligibility first or get pre-approved for a loan. Many lenders have online tools you can use to check your eligibility for a loan before you apply. This means you can avoid getting too many hard searches recorded on your credit report.
If you aren’t sure whether you’d qualify for a loan, it’s a good idea to get pre-approval from your lender before you start car shopping. Pre-approval is an assurance that your application will be accepted and that you’ll be able to borrow up to a certain amount. This will set your mind at rest that you’ll be able to go through with your purchase. It also helps you determine your price-range.
If you’re accepted for a loan, the amount you can borrow and the repayment terms you’re offered will depend on a number of factors. These include:
- your current employment status
- whether you have any other outstanding debts (a mortgage or another loan, for instance)
- your credit history
Step 3. Get your car and repay the loan
If your loan is approved, your loan provider will pay the full price (or any outstanding amount); and the car becomes yours. You’ll then have to repay the loan according to the terms you’ve agreed with your loan provider.
How do I repay a car loan?
If you’re approved for a loan, you’ll receive a formal offer. The offer will include the total amount of the loan and, more importantly, your repayment terms.
Your repayment terms will consist of three parts:
1. The amount you have to pay each month
One portion of this amount goes towards repaying the principal, i.e. the amount you’ve borrowed. The other portion goes towards repaying the interest on your loan.
2. The term of the loan
You decide the term of your loan at the application stage. Car loans are usually repaid over three to five years, but some lenders might allow longer terms. The longer the term, the lower your monthly repayment. However, you’ll also pay more interest.
3. The rate of interest you’ll be charged (the APR, or annual percentage rate)
Lenders are businesses; and they’re in it to make a profit. Their profit is the rate of interest on your loan. Put simply, interest is the price of borrowing money. The APR is the interest plus any fees associated with the loan.