Why is my car finance so expensive?
It often seems like most drivers you speak to have their car on finance. It’s easy to see why, it’s affordable, it’s available, and its flexible.
But, in order to get the car you want, the finance deal will have to match your situation. If you already have a car on finance or you’re currently shopping around for quotes, you may be thinking why is car finance so expensive?
The truth is there is a whole load of factors which can affect the deal you are offered, from things out of your control like higher interest rates to personal factors such as your credit score. Your car finance deal will never look the same as anyone else’s.
If you’re struggling to keep up with your repayments or you simply want to understand how car finance is calculated, check out the points below.
Higher interest rates
The interest rate you are offered on a car loan can be determined by a number of factors. However, one which is a big factor is the current interest rates in the UK. Interest rates are set by the Bank of England and are based on their base rate of interested.
When the base rate of interest is higher, it makes it more expensive for people to borrow. If you’re shopping for a car at a time when interest rates are higher, you will end up paying more and there’s not much you can do about it. If you’re looking to get a car on finance when interest rates are higher, try shopping around for the lowest offer you can find on the market.
Bad credit score
Your credit score has a big impact on the car finance deal you are offered. Credit scores are used by lenders to see how you’ve handled your credit in the past. If you’ve paid on time and keep credit usage low, you’ll probably have a good credit score, this is favourable by lenders because you’re less likely to default on future loans.
A better credit score can give you access to the lowest interest rates and also gives you more options. If you’re struggling to get approved for bad credit car loans, you could consider improving your score before applying for finance and putting yourself in a better credit situation.
No deposit
If you’re shopping around for car finance deals, the 0 deposit car finance deals can look attractive and they’re great if you don’t have any money to put down straight away. However, they don’t give you opportunity to make the deal cheaper than it should be.
When you put down a deposit for finance, the money is taken off the overall loan amount. This makes the loan smaller and means you could reduce your monthly payments or the loan term. A deposit contribution may also be more favourable with lenders as they don’t have to borrow you as much.
Refinance your deal
If you already have a car on finance and you’re struggling to keep up with your repayments, you could consider refinancing your car loan. Refinancing is when you take out a new loan which replaces your old loan and usually, you can refinance to better terms.
If you’re struggling with your current payments, refinancing could help you to extend the loan term and make your monthly amount smaller. Usually, lenders will only really consider refinancing your current deal once you’re more than half way through your agreement so this is worth keeping in mind. Refinancing too early into the deal may not be cost effective.
Short loan term
When you’re taking out a car finance deals, you’ll have options to change the deal to suit your budget. If you choose to lengthen the loan term, you’ll notice the monthly payment reduces, and similarly, shortening the loan term will increase the monthly amount.
It can be beneficial to pay off the loan as fast as possible but it could leave you out of pocket. Before committing to a finance deal, ensure the loan term is right for your budget and you’ll not fall behind on your payments.
