How to get a car loan
Looking to get a car loan to spread the cost of your new set of wheels? Read on to find out how to make sure you get the best possible deal.
While getting a new car is incredibly exciting, one look at the price tag can quickly dampen your enthusiasm.
That new car smell doesn’t come cheap. In fact, many people can’t afford to pay the full price at once. Unsurprisingly, one of the most common reasons for getting a loan is to pay for a new car.
But, how does a car loan work? And how can you get the best deal possible? Would you even qualify for a loan?
Read on for the answer to these and other questions about getting a car loan.
What is a car loan?
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. Here’s how it works:
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
2. Apply for a car loan
You can apply for a loan at any bank, building society or independent loan provider.
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 you.
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.
What are the advantages and disadvantages of getting a car loan?
A car loan’s main advantage is that you own your car outright as soon as you collect it from the dealership. By contrast, if you sign a hire-purchase agreement, you’ll only own the car once you’ve made the final payment. And, if you opt for a lease, you’ll never own the car.
That said, car loans have disadvantages too. The main one is that cars quickly depreciate in value. Your car will be worth a lot less than you paid for it by the time you repay the loan in full.
In addition, most insurance companies pay claims based on market value, not on purchase price. In the event of an insurance settlement, you may also get a lot less than you paid for your car.
How do I get a car loan?
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
- your annual income
- whether you have any other outstanding debts (a mortgage or another loan, for instance)
- your credit history (more on this later)
You kick off the process by filling out an application online or in branch. Your lender will then make a decision based on the information you provide in your application.
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.
Many lenders have online tools you can use to check your eligibility, including ClearScore. Check loans you’re eligible for.
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.
As you’re shopping around for a loan, you’ll probably notice that lenders use the phrase “representative” APR.
A representative APR is the typical interest rate and fees that a particular lender charges its customers. It’s useful because it gives you an idea of how much you’d pay for the loan. This allows you to compare different lenders.
That said, you won’t necessarily get this rate. By law, lenders can only advertise a representative APR if at least 51% of applicants actually get that rate. But this doesn’t mean everyone will get it. In fact, 49% of people don’t.
And that’s not all.
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.
How does my credit rating affect my chances of getting a car loan?
Your credit rating is really important. When a lender loans you money, it assumes the risk you might not pay back your debt. Your credit rating helps determine the likelihood of this happening.
Before you’re approved for a loan, the vast majority of lenders will run a credit check. This helps them decide three main things:
- whether to accept your application at all
- the maximum amount they’re prepared to loan you
- how much interest to charge you
The better your credit score, the more money you can borrow. You’ll also get a more favourable interest rate.
If your score is low, on the other hand, you’ll be offered less money and a higher interest rate. In the worst case scenario, a lender may consider you too much of a risk and reject your application.
How can ClearScore help me?
ClearScore wants to help you make better financial decisions by giving you unlimited access to your credit report and score, for free, forever.
We’ll help guide you to the best products for you. Using the offers section of your ClearScore account will show you a range of loans that you’re eligible for based on your credit score.