Common Car Finance Mistakes and How to Avoid Them

It’s no coincidence that cars are objects of desire. They enhance drivers’ freedom of movement and are synonymous with social status. But this comes at a price. These vehicles can be so expensive that buying them outright is almost impossible. Fortunately, consumers have access to various financial products that make car purchases easier. To make a good deal, check out the most common car finance mistakes and how to avoid them.

What is Car Finance?

Car finance encompasses a range of financial options enabling individuals to acquire a vehicle. Rather than making a full payment upfront, buyers can distribute the expense over time. The most popular financing options are:

1. 1. Hire Purchase (HP): In this type of car finance, you pay an initial deposit, followed by fixed monthly payments over an agreed period. Once all payments are made, you own the vehicle. During the repayment period, the lender owns the vehicle, and you only become the owner after the final payment.
   2. Personal Contract Purchase (PCP): PCP involves lower monthly payments than HP. You pay a deposit and monthly instalments over a set period. At the end of the term, you have three options: pay a final ‘balloon’ payment to own the car, return the vehicle to the dealer, or trade it in for a new automobile and start a new PCP agreement.
   3. Personal loans: A personal loan is a straightforward product. You borrow the necessary money from the bank to buy the car and repay the loan in instalments over a predetermined period. The advantage is that you own the vehicle outright from the start.
   4. Leasing: This is essentially a long-term rental. You pay a monthly fee to use the car for a specified period and mileage limit. At the end of the lease term, you return the vehicle. The main advantage of this system is that the monthly instalments are usually cheaper than other financing options. On the other hand, you never actually own the automobile.
   5. Personal Contract Hire (PCH): Similar to leasing, PCH allows you to use the car for a set period and mileage limit. You pay an initial rental followed by monthly rentals. Maintenance and servicing may be included in the contract. At the end of the term you return the vehicle, without the option to purchase it.

Should You Buy a Car on Finance?

Each type of finance has its own terms and conditions, so it’s essential to consider your current situation and future plans when choosing the best option for you.

If you have a steady job or stable income that allows you to plan for the long term, financing a vehicle can be advantageous. It enables you to spread the cost of the car over several years, making it more manageable within your monthly budget.

On the other hand, if your income is variable, adding a fixed cost to your living expenses might cause some headaches. In such cases, you might find it challenging to keep up with monthly payments during periods of lower income, potentially leading to financial stress or even defaulting on the loan.

Consider your lifestyle as well. If you take great pleasure in driving a particular model but cannot afford the upfront costs, financing can definitely help you achieve your dream. Options like Personal Contract Purchase (PCP) allow you to drive a newer, higher-end model with lower monthly payments compared to traditional loans, albeit with a final balloon payment if you choose to keep the car at the end of the term.

Moreover, if you enjoy changing cars frequently, leasing or PCP might suit you better, as these options often include the ability to upgrade to a new model every few years.

However, it’s important to remember that if you already have the money to buy the car upfront, it might be cheaper than any other option. Paying outright means you avoid interest charges and finance fees, retain full ownership of the vehicle immediately, and can resell it when the time comes to move to a new one.

Common Mistakes to Avoid with Car Finance

• • Not Shopping Around for the Best Deal:

Compare interest rates, terms, and conditions from various banks, credit unions, and dealerships to ensure you get the best deal.

• • Ignoring the Total Cost:

Calculate the total cost of the car over the life of the loan, including interest, to understand the true cost.

• • Not Checking Your Credit Score:

Check your credit score before applying for finance and take steps to improve it if necessary to secure better terms.

• • Overextending Your Budget:

Set a realistic budget and choose a car that fits within it, considering all related expenses like insurance, maintenance, and fuel.

• • Choosing a Long Loan Term:

Choose the shortest loan term you can afford to minimise the overall interest paid.

• • Not Understanding the Finance Terms:

Read the contract carefully, ask questions, and ensure you understand all aspects, including interest rates, fees, and early repayment penalties.

• • Skipping the Down Payment:

Make as large a down payment as possible to reduce the loan amount and monthly payments, and to potentially get better loan terms.

• • Being Mis-sold

Be aware of mis-selling practices, such as receiving advice that doesn’t match your financial situation or needs. Do your own research to ensure the finance option suits your circumstances. Always ask for all the information in writing and take the time to review it thoroughly before making a decision.

• • Not Fighting for Your Rights

If you have been mis-sold a financial product, fight for your rights through car finance claims. You may be entitled to hundreds of pounds in compensation.

Financing a car can be both the fulfilment of a dream and the start of a financial nightmare. It is important to understand all the details of the contract and avoid the most common mistakes to ensure you are making a good purchase.