How Car Finance Works for Brand New Cars: Everything You Need to Know

Buying a new car will no doubt excite the enthusiast in you, but it is important to know how car finance for brand new cars work for you to make the most informed decision. There are many ways to actually finance your dream vehicle and it is important that you understand the process from choosing your perfect vehicle, to financing it and understanding the terms and how to repay it.

Below you’ll find the main stages in the car finance process to set you up with an understanding of what’s involved.

Step 1: Choosing the Right Car

The first thing to do when financing a car is decide what sort of car you wish to finance. Consider the features, size, safety ratings, and fuel efficiency of the models. Look for dealerships for any discounts or special offers that could affect your monthly payments. Buying a car requires searching hard to match your lifestyle and your budget.

Step 2: Know Your Finance Options

Now that you have chosen a car, you will then need to learn about the different finance options available to you. There are various types of car finance agreements, each with their own pros and cons. The most common types include:

• Personal Contract Purchase (PCP): PCP means lower monthly repayments over a certain period, and you can choose to hand back the car after it reaches the end of the agreement, with the final balloon also to be paid before the car is returned.
• Hire Purchase (HP): HP is a way of paying for the car over a certain period. You own the vehicle at the end of the term.
• Leasing: With leasing, you pay a monthly rental charge which includes the cost of the car and the interest. At the end of the contract you return the car and you have no opportunity to buy it.

Both options have pros and cons, and you want to choose the best fit for your financial goals and how long you might need the car.

Step 3: Assessing Your Credit Score

If you are trying to finance a new car, your credit score is important. Lenders will check out your credit history and see how reliable a borrower you are. A higher credit score might result in better financing arrangements such as lower interest rates and higher acceptance chances. 

You do have options if your credit is bad, but they’ll most likely come at a higher cost. It may be worth checking through your credit history before you apply so that you can see if there are any mistakes on it that could prevent your application from succeeding.

Step 4: Securing Finance

Once you have decided on the type of finance, you then apply for the loan. The application is made through the dealership, a bank or specialist car finance provider. You will need to submit details about your employment, your income and expenses, and your credit score when you apply for a loan. After reviewing your application, lenders will determine whether to authorise the loan and, if so, under what conditions.

Many dealerships will offer in house financing but it is always worth your while to get the best deal you can by comparing in house financing to that which is offered by external lenders. Shop around and use online tools to compare rates and terms before deciding.

Step 5: Understanding the Terms

Make sure you always read the terms of the loan before signing any agreement. It will include the interest rate, the total amount of repayment, the term of the loan and any other fee or charge. If you are looking at car finance for brand new cars, then the annual percentage rate (APR) is the overall cost of borrowing and something to bear in mind. You will pay less interest over the life of the loan if you can get the lowest APR.

If you are taking out a PCP agreement, check the agreed mileage limits, as going over them will mean extra charges at the end of the term.

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Step 6: Managing Repayments

Once you have secured your loan, it is time to manage your repayments. Make sure you never miss a payment by setting up a direct debit or other automatic payment. Set up a direct debit or other automated payment so you never miss a payment. Like any loan, if you miss payments, you could hurt your credit score and be charged fees or even have your car repossessed.. Make sure your monthly payments will comfortably fit into your financial plan.

If at any stage you are struggling to make your repayments, contact your lender to discuss options. There are lots of lenders who can help you to restructure your agreement so you can make payments more easily or they can offer payment holidays.

Step 7: What Happens at the End of Your Finance Term?

The type of agreement you sign dictates what your options are at the end of your finance term. If you went for a Hire Purchase agreement, you’ll own the car completely once all payments have been made. If you have a PCP, you’ll have the option to either pay off the final balloon payment to own the car, return it, or trade it in for a new one.

If you make the decision to not continue with the car, you may be offered the opportunity to refinance the balance, giving you a bit more flexibility as your needs shift.

Navigating the Car Finance Process

If you are wise, research your choices and track your payments then you can get a brand new car with all the bells and whistles using the right financing. Always take your time to investigate, weigh your options and speak with experts if you are unsure about something. If you approach car financing the right way, it can be a fairly easy and rewarding thing that will enable you to buy your dream vehicle.