August 22, 2019 at 9:11 AM
Car buyers are increasingly using car finance products to fund their new set of wheels. In fact, 86.5% of new private cars were bought using finance in the 2016/17 financial year, while 1.27 million private used car sales had a finance agreement in place.
Financing a new or used car is clearly a popular option in the UK, but not everyone is aware of the checks that take place in order for a finance application to be approved. Unfortunately, it's not possible to receive car finance without a credit check being performed by the prospective lender.
Car finance lenders are potentially pledging thousands of pounds to someone they've never met. Performing background financial checks is a way for them to risk assess applications and determine how likely it is for them to get their money back.
Before You Apply For Car Finance
Taking out a car finance agreement is a big commitment, so here are a few tips you should consider before signing on the dotted line.
CHECK YOUR CREDIT SCORE
It's impossible to be accepted for car finance without having a hard credit check. Lenders will use a credit agency (e.g. Experian or Equifax) to get an understanding of your financial history and current financial position.
Checking your own credit score is easy and free when you use a tool such as ClearScore. All you need to do is sign up for an account and enter some personal information - it takes a matter of minutes.
One of the main reasons to check your credit score is to see if there are any inaccuracies. An application can be declined even if you have an impeccable credit score and credit history for something as simple as an incorrect address.
Knowing your credit score also gives you an indication of the interest rates you'll be offered. People with excellent credit ratings are more likely to be offered cheaper deals. Even if you don't have the best credit score, you can still obtain car finance, but you might have to pay more because you represent a bigger risk.
Some dealerships and brokers will enable lenders to perform a soft search which allows them to see how any loans or finance agreements are currently being managed or have previously been managed. It doesn't leave a mark on your credit profile and it helps to determines how likely you are to be offered car finance.
WORK OUT A MONTHLY BUDGET AND DEPOSIT
Although the finance company will assess how much they think you can afford to repay, you should have a monthly budget in mind before you start the car finance application process.
Once you have a figure that you can afford to pay each month on top of car insurance, road tax, fuel and maintenance costs, you need to decide how many months you want to spread the payments over. The longer the repayment period, the cheaper the monthly payment; however, you will be paying more interest.
Finally, you need to know how much of a deposit you'll be putting down. It's possible to finance a car without a deposit, but the monthly repayments will be more expensive. If you have an old car you're upgrading, it can be used in part exchange as a deposit to reduce the overall amount you have to pay.
If you're planning to finance a used car, you can typically work out the list price of the car you can afford depending on the APR rate offered by the dealership or broker, the number of months you want the agreement to last and the deposit you have to put down. Most dealerships will have a finance calculator on their website you can use.
UNDERSTAND THE DIFFERENT TYPES OF CAR FINANCE
There are four main finance products you can use to get credit on a car: PCP, HP, Lease and Personal Loan. Each type of finance is different in terms of the monthly payments and your consumer rights.
Personal Contract Purchase (PCP) is the most popular car finance method because it usually offers the cheapest monthly payments. Once you decide the length of the agreement and your annual mileage limit, the car will be given a Guaranteed Minimum Future Value (GMFV).
The GMFV and your deposit amount will be deducted from the total value of the car. The remaining amount will be spread across the agreed number of months with interest - this will be your fixed monthly payment.
At the end of the agreement, you can choose to pay the GMFV (also known as the balloon payment) to own the car; you can return the car back to the dealership, or use any positive equity as a deposit to start a new finance agreement.
Hire Purchase (HP) is similar to PCP because you decide the length of the agreement and your deposit amount which is deducted from the total value of the car. The remaining amount is spread across the agreed number of months with interest to provide your fixed monthly payment.
Unlike a PCP agreement, there isn't a deferred amount to be paid at the end, which is why the monthly payments are more expensive. Instead, once you've made the final payment, you become the owner of the car.
A lease agreement is essentially a rental agreement and you won't have the opportunity to buy the car at the end of the contract. Most lease agreements require a three, six or nine month initial deposit.
For example, if you took out a 36 month lease agreement at £200 per month and the lease company asked for a three month initial deposit, you would need to pay £600 at the start of the agreement, then £200 per month for the next 35 months.
Normally, cars financed through a lease agreement include all servicing and maintenance costs which tends to make them more expensive than PCP and HP equivalents.
Instead of financing your car purchase through a dealership or broker, you can take out a personal loan from a bank or building society. Using the money you borrow, you can buy the car outright.
Depending on your credit status and where you get the loan from, interest rates can be much smaller, meaning that you will pay less over the repayment period.
What Information & Documents Do You Need To Apply For Car Finance?
When applying for car finance, the finance lender will need you to provide certain information as well as various documents and proof of identification. In addition, they will perform a hard credit check to access information held by third parties about you.
As part of the application, you will need to specify the exact car you're planning to buy along with your deposit amount and the monthly payments you're planning to make.
Firstly, you will be asked to provide the following personal information:
- Full name (and previous name if you've change it)
- Date of birth
- Marital status
- Residential status (e.g. home owner, renting, living with parents, etc.)
- Full address history for at least the last three years
EMPLOYMENT DETAILS AND HISTORY
Lenders will typically ask for the name and full address (including postcodes) of all your employers for at least the last three years. If there are gaps in your employment history or you've frequently changed jobs, you may be asked to go back further than three years.
You will need to provide your current job title and salary (and potentially for the last three years as well). If you're self-employed, the finance company will need proof of income from records of accounts or other documentation.
You need to provide the bank account details (account number, sort code and address of the branch) for the account your monthly payments will be taken from.
Typically, the account needs to be solely or jointly in your name. If you've been with your current bank or building society for less than three years, you may need to provide previous bank details.
Since you're applying for car finance, it's expected that you will have a valid driver's licence. Without one, most finance lenders will automatically reject an application.
If you can't find your licence, or it's currently with the DVLA, you will need to provide additional personal identification (e.g. passport). To confirm you do have a driver's licence, the finance company will also contact the DVLA.
PROOF OF ADDRESS
Usually, you'll be asked to provide two proofs of address to confirm you live where you say you do. Utility bills (e.g. council tax, gas, electricity, water, etc.) and certain forms of bank statements are normally used.
You have to be named on the documents (either solely or jointly) and they will need to be dated within the last 90 days (three months) to be accepted.
PROOF OF INCOME
The finance lender may ask you to provide proof of income depending on your current employment details or employment history. If you employ an accountant, it's often easiest to have the dealership and accountant contact each other to provide the necessary documentation.
If you keep your own financial records, you might need to provide bank statements to demonstrate your income. However, if you're income is largely cash-based, other information and documentation will be needed to support your income claims (e.g. tax return information).
It's unlikely that you will be asked to supply a payslip unless the lender needs more concrete evidence of your income to approve your application.
Will I Get Approved For Car Finance?
Not all finance companies are the same and they all have their own criteria that applicants need to meet. If you're not eligible with one lender, this doesn't necessarily mean you won't be able to get car finance elsewhere.
Knowing your credit score will help you determine how likely you are to be accepted by certain lenders. Even if you have poor credit, there are specialist finance companies that will accept your application, but you might end up with a higher interest rate to mitigate the risk.
The most important thing with any finance application is to be honest. Lying on your application is fraud - a serious criminal offence - which will ensure that your request for finance is declined and blacklisted by the finance company.
How Long Does It Take For Car Finance To Be Approved?
Normally, it takes 1-2 business days for a car finance application to be approved. Copies of all your documentation, the signed vehicle contract and signed finance contract are all sent to the finance lender.
There's usually three outcomes from this point: your application is approved, the finance company requests more information or your application is rejected.
An approved application releases the funds for the car which is paid to the dealership or broker and the contract is activated. Alternatively, a rejected application is bad news and the finance company is not willing to lend you the money for your new car.
It's not uncommon for the finance lender to ask for more information. It means your application is being considered, but some necessary information is missing for them to make their decision. If you're able to provide the right answers, the application should swiftly be approved.
If you have the right information and documentation with you, it's possible to get your finance accepted so you can drive away in your new car the very same day.