For many drivers, getting their next car would not be possible without the use of finance to help spread the cost. Even second-hand cars can be expensive to buy outright and may be unobtainable without a car loan to fund it. If you’re new to finance or you’ve chosen the wrong agreement in the past, you may be wondering how much car finance should cost and the factors that affect car finance rates. Each person who applies for car finance will be offered a different rate and pay varying payments each month so it can be a good idea to learn which factors affect car finance first to help make your loan cheaper.
How are car finance costs calculated?
Car finance lenders have made it even easier for customers to compare finance rates through car loan payment calculators and see how much they could borrow even before they apply. You can set your monthly budget, credit score and loan term length to see how much your car finance could costs. There are also a number of factors which can affect your monthly payment costs.
How much you want to borrow will affect how much your loan will cost. Your loan amount will be split into equal monthly payments with interest and a higher loan value will cost you more a month. The loan amount will be determined by the cost of the car you choose and if you want to keep costs low, it can be a good idea to choose a cheaper car such as second-hand.
Loan term length.
When you take out a finance deal, you can choose how long you want to make repayments over. Usually, finance terms are between 3-5 years and a shorted loan term means you pay off the finance faster. It can be tempting to choose a longer loan term as it reduces the monthly payment but, in many cases, it can mean you pay more interest overall so might not be the most cost-effective option.
Your credit score is really important for car finance. Finance lenders will run a credit check on you when you apply to see if they want to offer you finance or not. When you have a low credit score or have a history of missing payment, it increases the risk to the lender as you’re more likely to do it again in the future. Lenders may even decline your finance application if you have a bad credit score. Applicants with better credit scores and a long history of sticking to repayment schedules get access to the lowest finance rates which can help to make finance cheaper.
Unless you can secure a 0% interest deal for car finance, you will usually have to pay interest on top of your loan. The interest will be included in your monthly payments and higher interest rate offered will affect how much you pay back. I can be worth comparing car finance interest rates to see what the lowest rate is you could get.
A deposit contribution is an amount of money you put down at the start of your finance deal. In some cases, a recommended deposit can be around 10% of the total loan value or you can also choose no deposit options if you don’t have any savings to hand. Any money put down at the start of the loan will reduce the loan amount and helps to make the loan smaller. A smaller loan can then lower your monthly payments and the interest rate offered.
Other costs associated with running a car:
Your budget for a car should also factor in the day to day running of the vehicle. There are a number of costs that fall outside of finance, some of which are essential by law.
· Fuel costs or recharging an EV.
You will need to look at the cost to run your vehicle and depending on which fuel type you choose;your costs may vary. Petrolanddiesel cars will need to be refuelled. Petrol cars tend to be cheaper than diesel cars but diesel cars usually get better MPG so it can be worth comparing both and thinking about the type of journeys you make. Electric cars can be more expensive to purchase but they benefit from much lower running costs.
· Insuring your vehicle.
In the UK, each and every car driven on the roads needs a valid car insurance policy in place. Failing to do so can result in a penalty charge notice and even lead to you being disqualified from driving. Insurance rates can vary depending on your driving experience, your personal details, and the type of car you drive. Some cars can be more expensive to insure than other so if you want to keep costs low, it can be worth comparing cheap cars to insure, especially if you’re a young or newly qualified driver.
· Taxing your vehicle.
Just like car insurance it is a legal requirement for your car to be taxed in the UK. Car tax or Vehicle Exercise Duty is a yearly tax on any road worthy vehicle. Some cars such as electric vehicle can benefit from no tax to pay but they still need to be taxed through the government website.