Welcome to our new Q&A series How to Car – From those ‘In the Know’, I am Laura Weston and I am here to answer your questions on ‘Car Finance plans’.
With so many options out there to purchase your ‘new’ used car, how do you know if the payment option is right for you? Or could an alternative route be a better option for your financial lifestyle?
Q: I am currently saving for a house but also really need a second car as our family has grown. Do I a) take some of my savings from my house fund and have a larger down payment on a used car, but then my own home is further away or b) leave the house fund alone and have a larger monthly payment for the car. Will the extra outgoings for my car finance affect my credit score for a mortgage?
A: I’m so pleased you have had the foresight to take this into consideration, as most people wouldn’t think twice so you’re already a step ahead. Any monthly credit payments will affect the total amount available to you on a mortgage, so in an ideal world you want to keep any monthly credit payments to a minimum. Car payments in the hundreds of pounds can have quite a big effect on mortgage offers, it could be as much as £80k-£100k reduction difference in lending. In addition to that, any credit checks made six to 12 months prior to a mortgage application could have a negative effect on your credit score, especially if you are declined for credit and unfortunately, you’re not going to know the chance of this until you make the application. A better option may be to buy a less expensive car, use some of your house savings, aiming to not take any car finance and then top the difference up for the house purchase, with one of the many First Time Buyer or 95 per cent mortgage schemes available. Best of luck in achieving your goals and well done once again for making this consideration.
Q: I purchased my car a few years ago on PCP. When the agreement comes to an end, I have 3 options: 1) pay the final payment and own the car, 2) return the vehicle OR 3) part exchange the vehicle.
Which is the most financially viable option in the long run? Considering I would need to maintain an older car with option 1 which may have costs associated and having already paid money for it each month. Or if I hand it back, I don’t get any more for it to buy a new one. Is option 3 the best one perhaps?
I think the real questions to ask yourself are, how does my current car support my future requirements? If I make the balloon payment, will I miss out on other money goals I want to put that money towards? This really is personal preference based on your lifestyle and requirements so you may get benefit from reviewing this situation with a financial expert.
Consideration to owning this car is only really appropriate if it fulfils your needs for the next five to seven years and you can make allowances for the cost of running an older car. As you have said, considering the ongoing cost of running a car is an important aspect a lot of people forget about. Making an allowance for a yearly service, MOT, tax, insurance, any repairs required to the car and changing the tyres every few years can be expensive, so saving for these costs on a monthly basis is a best practise. Of course, these figures may be higher for an older car. This is often something forgotten about when committing to a car; it’s not just the monthly price tag that needs budgeting. Returning the car could be a costly option depending on any damages and the mileage so with that in mind, part exchange seems like a sensible option but please remember all the additional costs that come with running a car along with your future requirements for a vehicle and other money goals you may have.
Q: I am 18 and a first time buyer and I am looking for some finance options available to me – this will be my first time taking finance on anything (does this affect my chances as I have no credit history?)
Firstly, well done on having an awareness around your credit score at 18 years old, most adults have never considered or looked at their credit score even though it’s probably their most important asset. You are absolutely right to protect your credit score as it will really help you unlock many doors as you continue to move into adulthood. The chances of you obtaining car finance are very slim with no history. I would suggest spending the next six to 12 months building your score up before applying for car finance. There are a few simple ways you can do this:
– Review your credit score on a monthly basis, check everything looks correct and analyse if it’s gone up or down.
– Apply for a credit card with a reputable bank, maybe alongside your bank account would be the best option. Use it on a monthly basis but plan to pay it off each month. An additional way to increase your score is to never spend over 30 per cent of the limit and paying it off over two payments will boost you up even further.
– Make as many of your monthly payments automated on direct debits and standing orders. Any payments outside of this do not help build your score in the same way.
– Ensure you are on the voters roll at your home address and don’t change address on your bank account unless absolutely necessary. If you choose to go to university, keep your address as home and add a correspondence address for your university address if need be.
– Use facilities such as a catalogues and mobile phone contracts to have small credit agreements with, as this proves you can borrow money and pay it back.
I’m so pleased this is already on your radar. Please talk to your friends about it as awareness around this subject within your age range needs raising. Your credit score is your most important asset, therefore it needs nurturing, reviewing, growing and maintaining.
“After enjoying a 20 year career with the one of the World’s Largest Banks, Laura is founder of a financial coaching business, Savvy Peacocks. Laura is also a co-parenting mother to 3 children and a puppy so it’s a good job she works best when she’s busy! Savvy Peacocks support families to break down the taboo subject of money within the home through a collaborative learning approach for both parents and children. They have a mission to increase financial literacy across the UK through our future generations working with children as young as 5 yr old up to 21 yr olds.
April 26, 2021