If you're confused about car finance, we can help. Here we break down the most common car finance myths so you can buy your car with confidence.
1. I can't get car finance with a low credit score
With a less-than-sparkling credit history, you may still be able to borrow, but at higher interest rates. Consider raising a larger deposit, and buying a cheaper car, so you will only need to apply for a smaller loan. This can help keep the payments more manageable.
You can also see your tailored car finance deals based on your personal circumstances in your ClearScore account.
2. Shopping around for deals will ruin my credit score
When you compare quotes on ClearScore, what’s called a ‘soft search’ will be added to your credit report. Soft searches don’t affect your credit score, but allow lenders to calculate the best prices for your situation.
3. It's not ‘normal’ to borrow money to buy a car
Simply put, yes it is.
More than 80% of brand new car purchases involve some borrowing.
4. It's better to choose lower monthly payments
Typical car finance deals tend to last for one to three years, although hire purchase payments might be spread over up to five years.
Borrowing money for longer might be tempting because it makes your monthly payments lower.
However, with a longer loan you will also pay more interest in total.
- For example, if you borrowed £10,000 at 4% over three years, your monthly payments would be £295 and you would pay a total of £617 in interest.
- Stretch the same loan over five years, and although your monthly payments would drop to £184, the total interest would shoot up to £1,031.
Again, if you’d like to cut the monthly costs, it could well be worth choosing a cheaper car, so you only need to borrow a smaller sum.
5. Getting car finance is easiest through a dealership
No, not necessarily. It’s worth comparing ways to borrow, and getting different quotes. Remember, the dealer will usually get commission from the finance company. This means if you opt for dealer finance, you may be able to haggle about different interest rates, discounts and extras like insurance, warranties and service agreements. With finance from a car manufacturer, you may even be able to get 0% deals and contributions towards the deposit.
In contrast, if you pay cash or borrow elsewhere, you’ll have less chance to haggle, so weigh up the total package.
6. I should compare car finance deals based on interest rate alone
When comparing borrowing the same amount for the same time, the key figure to consider is the annual percentage rate (APR), which is the interest you will pay when borrowing money for a year. Car dealers may focus on the monthly repayments, but it’s also important to consider the length of the finance package, the total you will pay overall, and any extra fees and charges. If you ask for quotes in writing, you can go away and compare the terms and conditions.
7. All car finance offers I receive are going to be similar in price
The FCA recently estimated that car finance lenders have charged consumers up to £300m a year in unnecessarily steep rates. So it’s more important than ever to do your research. You can see your car finance offers, tailored to your personal circumstances, in the 'Offers' section of your ClearScore account.