What to consider before financing your next car?

You will need to assess your total budget before financing a new car, whether you have it financed from a car dealer or a private lender. The first thing you need to decide is whether you want dealership financing or direct lender financing. Hire purchase and personal contract purchase are the two most prominent financing options available from car dealers who are seeking ownership, while auto loans are available from direct lenders.  

Hire purchase and auto loans from direct lenders work the same way. You will be required to put down at least 10% of the sticker price of your car as collateral. Ownership is transferred to you at the end of the settlement of a hire purchase agreement.  

However, it remains with you since starting with auto loans from a direct lender, although lenders will have the upper hand in case you default. If you want to sell your car before the end of your loan term, you will have to clear your debt in full at that time, but this will result in early repayment charges.  

Things to consider before financing your next car 

Here are the things you should consider while financing your next car: 

The total cost 

First off, you need to decide between dealership financing and personal loans. Auto loans from direct lenders might prove to be a cheaper option than hire purchase because you have the freedom to sell your car at any time. Still, hire purchase does not provide this facility as the title is transferred to you only at the end of the final settlement.  

Personal contract purchase is an ideal option for those who want to upgrade their cars in a short space of time. This requires you to pay only the depreciation cost. You can consider buying it after making a balloon payment at the end of the contract, or you can renew the contract for a new car by returning your current car.  

Determine the total cost of a car. It is not necessary that you will always find personal loans cheaper, as there are other factors, such as your credit score, that lenders take into account to assess the risk involved in loaning you money. You should carefully consider the total cost of the car loan.  

Your credit score 

How affordable your car deal will be largely boils down to your credit score. Whether you intend to borrow money from car dealers or online lenders, car loans in Ireland could be cheap if your credit score is up to scratch. A golden rule of thumb says that your score should be decent. In fact, a fair credit score cannot help you qualify for lower interest rates.  

If your credit rating is not perfect, you should try to improve your credit score if you can postpone the idea of buying a car. Having a bad credit rating does not rule out the possibility of being accepted by lenders, but they will charge high interest rates. Yet, you will need to put down a larger deposit.  

Those with a good credit score are required to put down 10% of a car’s value as a deposit. However, if your score is not up to scratch, you will have to double it. A larger down payment reduces the loan-to-value. As a result, there are slim chances of qualifying for lower interest rates.  

The loan repayment term 

The next thing you need to look at is the loan repayment term. Normally, the repayment term for a car loan is less than 5 years, but it depends on your repayment capacity as well. If you do not have a large budget, you will certainly have to choose a longer repayment term.  

This will reduce the size of monthly instalments. Though this makes the loan more affordable, you will end up paying a lot more money in total. Try not to choose a way too short loan tenure nor too long.  

Additional fees 

Another important factor that most of the car buyers do not take into account is the additional fees. Lenders and car dealers charge fees which are generally included in the interest. You can come to know about these fees by reading the fine print in your contract. Normally, they charge processing fees, which are one-off cost but some lenders charge monthly fees as well.  

Make sure that you have carefully analysed the lender you are applying for a car loan from a lender does not charge monthly or hidden fees. Do not forget to take into account early repayment charges and late payment fees. Compare car finance deals with those of direct lenders and then decide which one costs you less money.  

Evaluate your affordability 

You cannot underestimate the importance of your budget. Maybe you think you have an inexpensive car loan, but monthly payments can take a large chunk off your budget, leaving you with little money to pay for your monthly expenses. If you struggle to meet them due to car loan payments, you will have to borrow money to cover them, which means you will end up racking up debt.  

Do not purchase a car if you are not certain about your repayment capacity. Even if you have a strong income source, you might struggle with repayments in the future. You must have a repayment plan in case your financial condition is turned upside down. Being unable to repay your debt will not only put your car at risk, but it will also ruin your credit score.  

The final word 

There are several factors that you need to consider while financing your next car. First off, you need to check your needs. If you have to upgrade your car frequently, a personal contract purchase is a better option. Otherwise, consider hire purchase or car loans.  

Check your credit score. If it is not stellar, try to improve it a bit. Consider the additional fee and loan tenure. All these factors are important to examine to ensure that your car loan will not cost you a lot of money.