Learning how to drive is a life skill that is only really useful if you actually have a vehicle to drive. As everyone knows, cars are expensive to buy and maintain; so becoming a car owner - particularly as a young person under 24 - can be difficult, especially if you have to buy it outright.

The alternative is to enter into a finance agreement which allows you to spread the cost of the car over a number of months. This is a massive financial commitment that requires careful consideration of your present personal circumstances and what they are likely to be in the near future.

For instance, if you're about to start a full-time undergraduate course at university, it may not be the best time to enter into such a huge financial agreement. However, if you're living at home with parents and have a decently paid, stable full-time job, financing a car could be a good idea.

ARE YOUNG DRIVERS ELIGIBLE FOR CAR FINANCE?

Although you can pass your driving test at the age of 17, you aren't legally allowed to sign a credit agreement (including a car finance agreement) until you turn 18.

Just because it's legal at 18, it doesn't necessarily mean that lenders will approve your car finance application. A large proportion of the loan decision is based on the applicant's credit score and personal background. There are a number of things you can do to improve your credit score, even at a young age.

PUT YOURSELF ON THE ELECTORAL REGISTER

Lenders use the electoral register for identity checks. Being on the electoral roll is a form of proof that you're an official resident at the address you supplied on your finance application.

You can enrol and change your address online, but it may take a little while to update. It's important to do this because the finance company would normally request documents such as a council tax bill, utility bill, mortgage details or tenancy agreement to confirm your address - unless you're no longer living at home, these documents will not be in your name.

If you are looking to get car finance as a student, you should list your student accommodation address on the electoral register. Although it may be temporary, it's still classed as your main residential address.

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PUT YOUR PHONE CONTRACT IN YOUR NAME

Majority of people have some form of phone contract whether it's a rolling sim-only plan or a longer fixed term (normally 24 months). When you turn 18, it's a good idea to take out a new contract in your name or switch your current plan so it comes out of your bank account.

Most contracts are between £30 - £40 which is a relatively small amount (especially compared to car finance). Paying your bill every month can help to build a positive credit profile for lenders to see.

TAKE OUT A CREDIT CARD IN YOUR NAME

Having a credit card and being responsible with it is a great way to build up a healthy credit rating. Putting a couple of smaller purchases on the credit card rather than your debit card and paying off the balance at the end of the month demonstrates that you're able to make regular payments.

Lenders will be cautious about providing credit cards to young people with minimal credit history, so you're likely to get a small credit limit, which isn't necessarily a bad thing.

GUARANTOR FINANCE AGREEMENT

If you can't wait to build up your personal credit profile, you could consider a guarantor finance agreement. A guarantor is someone that commits to making your monthly payment if you can't - typically, this person is a parent.

Guarantor finance agreements do make it easier for younger people to get accepted, especially if the guarantor has a good credit profile themselves (being a homeowner helps). You could also be offered lower APR rates with the security of a guarantor.

However, the guarantor, who must be over the age of 21, should not agree to any finance deal if they're unlikely to be in a position to make the monthly payment when you can't. In the event that your guarantor fails to make a payment that you miss, both of you can be taken to court and it will negatively impact your credit scores.

BENEFITS OF CAR FINANCE FOR YOUNG DRIVERS

After doing your calculations and deciding that you can afford to commit to a car finance agreement, there are a number of benefits for young drivers.

LESS RISK THAN A PERSONAL LOAN

People with bad credit looking to finance a car are often advised to take out an agreement with a dealer rather than opting for a personal loan from a bank or building society.

Predominantly, this is because the loan with a car finance agreement is secured against the car, so the applicant is not the owner of the vehicle. Therefore, if they default on a payment, the car can be repossessed by the car leasing company that supplied the finance.

This is a similar situation with a young person. Although you don't necessarily have bad credit, you're lack of credit history would present a larger risk to a bank or building society.

BUILDS UP YOUR CREDIT SCORE

Making your monthly payments on time helps to create a positive credit profile. In turn, this will make it easier for you to get your next car finance agreement and you should be offered more competitive APR rates.

GET A 'BETTER' CAR

By spreading the cost over several months, you should be able to afford a more expensive car than you would if you bought it outright. A more expensive car doesn't necessarily mean a better car with regards to safety, technology, running costs and insurance premiums.

However, if you research the best models for young drivers, you will be able to find a more modern version with advanced safety systems and technology which help to reduce the insurance and running costs.

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TYPE OF CAR FINANCE AGREEMENT

You now need to decide what type of finance agreement is best for you. There isn't just one car finance agreement that everyone takes out, and if you're new to it, the choices and differences can be overwhelming. Check out our jargon buster for in-depth definitions.

Majority of finance agreements are either PCP (Personal Contract Purchase) or HP (Hire Purchase). Some manufacturers have also developed an all-inclusive agreement that is specifically aimed at young drivers.

PCP FINANCE AGREEMENTS

Personal Contract Purchase agreements include a voluntary 'balloon' payment at the end of the term, also known as the Guaranteed Minimum Future Value (GMFV). The GMFV is calculated at the start of the agreement and is based on the number of months and annual mileage agreed with the finance provider.

The GMFV is then subtracted from the value of the car along with any deposit you make. The remaining amount is split across the agreed term and this will be the amount you need to pay each month.

At the end of the term, you have three choices. You can pay the GMFV (balloon payment) and become the owner of the car; hand the keys back and walk away; or start a new finance agreement with a different car.

HP FINANCE AGREEMENTS

Hire Purchase agreements are much simpler. Your deposit is subtracted from the value of the car. The remaining amount is split across the agreed term and this will be the amount you need to pay each month.

At the end of the term you will own the car. Typically, HP monthly payments are more expensive than PCP deals for the same car because there isn't a deferred amount (balloon payment) to be paid at the end, instead, the entire cost is spread out equally.

ALL-INCLUSIVE FINANCE AGREEMENTS

Currently, the only manufacturers to offer this type of agreement are Peugeot and Citroen through their Just Add Fuel and Simply Drive programmes. Exclusively available on new cars, it combines insurance, servicing, road tax, warranty, breakdown cover and the cost of the car into one monthly payment.

These finance agreements are always over a 36 month term and are based on the PCP model, so you will have three options when you reach the end of the agreement.

They are specifically aimed at young drivers looking to get behind the wheel of their first car. It helps to overcome the two main obstacles: financing a car and getting insurance. If you're under the age of 21, a black box will need to be fitted for insurance purposes.

As the names suggest, everything, including maintenance, is taken care of so all you have to do is fill the car with fuel.

TOP TIPS FOR YOUNG DRIVERS TAKING OUT A CAR FINANCE AGREEMENT

A car finance agreement is a big commitment. For most people, buying a car is likely to be the second biggest purchase of their life (behind a house), so there are a number of things you should consider to help protect your investment.

GAP INSURANCE

This is an additional finance product that you can purchase to cover the 'gap' between the amount remaining on your finance policy and the compensation received from your insurance provider in the event of an accident.

As the GMFV in a PCP agreement suggests, the value of any car will reduce over a period of time. Consequently, if you're involved in an accident that results in your car being written off, your insurance provider will only offer you compensation for the amount the car is worth at the time.

GAP insurance will pay the difference between the car's actual cash value and the amount you have left to pay on your finance agreement regardless of whether the accident was your fault or not.

WARRANTY

All new cars come with a three year manufacturer warranty as standard, although up to seven years is available. A warranty provides financial cover for when certain parts of the car stop working and pays for the resulting repair or replacement costs.

There are different levels of warranty available, so you need to be careful and read what is actually covered by the policy. At Motor City Plymouth, we've teamed up with the UK's leading car warranty company - Warranty Wise.

As cars get older, so do their original parts, and they only have a limited lifespan which is why used cars are more likely to break down. A warranty provides financial protection against a potentially costly mechanical breakdown.

FACTOR IN OTHER COSTS

When you're playing with a car finance calculator to see if you can afford the monthly payments, it's important to remember that you need to include other running costs such as: insurance, road tax and fuel.

Using the registration number, you can get an idea of how much the insurance will be by getting a quote from an online comparison website. Similarly, you can find out how much the annual road tax bill is by putting the registration number into the gov.uk website, although most car dealers will display this with the car's information.

Finally, if you're predominantly going to be using the car to commute to work or university, you can calculate the amount of fuel you're likely to use. All you need is the number of miles you'll be doing, the car's estimated fuel consumption figures and the average price of petrol or diesel in your area. This won't be completely accurate, but it will give you a good idea of how much you're likely to spend on fuel in a month.

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FINANCE EXAMPLE OF A CAR COSTING £4,000

Taking out a car finance agreement doesn't have to be extortionate. In fact, there are deals out there for less than £100 a month. Using one of our cars, we produced the following finance example:

Type Of Finance

Hire Purchase

Cash Price

£3,999.00

Total Deposit

£399.00

Amount To Finance

£3,600.00

First Payment

£97.47

47 Monthly Payments

£97.47

Final Payment

£257.47

Duration Of Agreement

49 Months

Total Amount Payable

£5,335.03

Fixed Interest Rate

7.49%

APR

16.8%

February 15, 2019 at 9:23 AM


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Category: Buying Advice

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