Important considerations when applying for car loans and finance

When looking to pay for your next vehicle, an option you have is to apply for car finance or for a car loan.

This is often because loans and finance can provide greater flexibility with payments and more opportunities to afford the vehicle you really want, from new and used Audis to nearly-new and second-hand BMWs.

But before you apply, there are a number of important things to consider.

What kinds of loans and car finance are available?

You might have heard ‘car loan’ and ‘car finance’ being spoken about in the same context and, while they serve a similar purpose, there are important differences.

With a car loan you’re taking out an unsecured personal loan that you pay back in agreed monthly instalments, rather than paying for the car in full upfront. You’ll also pay interest on this loan as well as paying back the amount you borrowed.

When it comes to car finance and specialist plans, the difference is that there are more options like personal contract hire (PCH), personal contract purchases (PCP), and hire purchase (HP). PCP and PCH are essentially the same – you pay a deposit and monthly payments to cover depreciation, but you don’t own the car unless you make the final ‘balloon’ payment.

HP is effectively a loan secured against the vehicle, which you don’t own until you’ve made the final payment. The other common alternative is personal leasing where you pay a monthly fee to use the car but you can never own it.

Have you considered the additional car costs?

Whether you’ve got your heart set on a new or used car, before you think about a loan or finance deal, you should work out the potential costs of owning and running the vehicle.

New cars can lose up to a third of their value during their first year, while older vehicles and different transmission types, fuel types and engine sizes can offer varying levels of economy.

In addition, there’s annual car tax to pay on most diesel and petrol cars, car insurance, maintenance costs, and, in some areas, congestion charges. Take a look at our driving costs guide pages to learn more about this.

Can you afford a car loan or finance plan?

You also need to make sure you can afford your loan or finance payments on top of all your other monthly outgoings. And your credit score may affect the interest rate you pay, or even whether you’ll be accepted for finance if you take out a loan and other finance arrangements.

There are a few approaches you can take to help get a better deal or get a better interest rate on your loan or finance, and also help lower these payments. These include:

  • Paying a larger initial deposit as some car sellers might offer interest-free credit if you do.
  • Being prepared to pay partly in cash – for example, from your savings – and the rest on finance.
  • Negotiating on aspects of a lease, such as lowering the number of miles you intend to do each year.
  • Using budgeting tools to get a better understanding of your monthly expenses.
  • Shopping around for different deals.

How can your credit score be affected?

One thing to be wary of when shopping around for a deal is how your credit score can be affected.

Repeatedly getting quotes for loans and other finance deals can leave a ‘footprint’ that can negatively affect your credit score.

By lowering your credit score with these checks you won’t have access to more favourable deals and interest rates. However, there are some providers and brokers that carry out ‘soft checks’ on your credit history which won’t affect your score, like the AA car finance eligibility checker.

There is the AA car loans eligibility checker too. You can scroll down on this page and find the ‘Are you eligible?’ button to use the checker.

Are you ready to apply?

Now you’ve done your research, you might want to apply for an AA car loan or an AA car finance deal.

Each of these pages also includes information on the respective AA car loan and AA car finance application processes and the representative APRs, as well as who you can contact to find out more.

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