Finally, you have arranged a down payment for your car. Hurray! That is undoubtedly a great achievement. It seems like you have won a marathon, but the battle is not yet over. The next step is to find out what kind of funding option you will choose to buy your car.
There are three main options: personal loan hires and contract buys. Each of these loans has its own pros and cons. You should see which one works better. As you are about to finance your car, you are going to pay interest on top of what you borrow.
The length of these funding sources may be up to three years, which is not a very small period. Your financial situation may not be stable throughout this time period, so you must have enough money to stay afloat. Although you can use dealership financing, personal loans are more affordable and better than them.
Why should you prefer personal auto loans?
Auto loans are like personal loans. However, they are not absolutely standard personal loans. These loans do not require collateral, but personal auto loans are subject to collateral, and your car serves the purpose of security, but it does not mean you cannot use your car.
A lender will have the upper hand on it as they reserve the right to liquidate your car if you make a default. If you use hire purchase, you will pay a high-interest rate. It carries a higher interest rate than personal loans. You will have to pay a higher deposit size if you use a personal contract purchase.
While car loans and hire purchases to require a 10% deposit, personal contract purchases require a 15% down payment. It is going to be a lot of burden on your pocket. Further, it does not work the same way as personal loans and hires purchase.
It is a kind of rental agreement. You will be paying an agreed amount of money each month until the contract lapses. However, you will have to strictly follow the clauses of the agreement related to mileage, for example. If you exceed it, you will have to spend an extra cost.
At the end of the contract, you can return the car or get it in your name by paying a resale value or simply buy another one using the resale value under PCP. This is the most expensive way of financing your car as dealers may have recovered the full price of the car, including interest. There is no point in buying this car because it is simply a depreciated asset with no worth.
Auto loans can be expensive too
Although personal auto loans seem to be considered more affordable than dealership financing, it does not mean that it is always affordable. There are various other factors that you need to look at to get these loans at the most competitive interest rates.
Your credit score
Having a good credit history is foremost. A lender will peruse your credit report to see your past financial obligations to get an idea of how likely you are to make default. If your credit rating is not perfect at all, you will have to take car loans with bad credit.
These loans will certainly be expensive. While a borrower with a good credit rating will likely get these loans at 11.99%, a borrower with a poor credit rating will likely get them at 24.5%. Note that these loans can certainly be expensive when your credit file is not stellar at all. Therefore, it is suggested you build your credit rating before taking out auto loans.
- In order to improve your credit score, pay your debts on time.
- Do not forget other obligations like rent and utility bills. Your landlord may report your missed payment to credit bureaus.
- Use credit cards smartly because otherwise, you will end up using the entire balance leading to a sharp rise in the debt-to-income ratio.
- Overspending is one of the causes why you often need to borrow money from an online lender. Make sure you do not overspend money.
Budgeting can help avoid it. If you do not like tracking expenses through a manual spreadsheet, you should use a budgeting app.
Your repaying capacity
Another factor that a lender will look at is your repaying capacity. Even if your credit score is excellent, you can be denied a loan if a lender is sceptical about your repayment ability. Try to use an online loan calculator to get the estimated total debt cost.
This will help you know if your budget has a scope to fit this payment. Note that this is just an estimation; the actual cost can be much more. You will have to increase your income source to ensure you can pay back the debt.
Get a side gig or look for a job with higher pay.
Try to generate a passive income source like rental income if possible.
If increasing income does not seem to be a feasible option, you should look for a budget-friendlier car.
Other financial obligations
A lender would like to see if you have any other debts you have taken on. Having small loans like online loans in Ireland will not be a problem, but a big debt like an unsecured loan can be problematic. A lender may hesitate to qualify for the application, or they will charge a higher interest rate as it increases the debt-to-income ratio.
ü, Avoid having an outstanding debt at the time of taking out a car loan.
ü If you have some debts, make sure the debt-to-income ratio is not more than 30%.
Wrapping up
Car personal loans are undoubtedly more affordable than hire purchases and personal contract purchases. Your credit history is good, your repaying capacity is excellent, and the debt-to-income ratio is not too high. If you stick to all of these factors, you will be able to qualify for a car loan at affordable interest rates.
