Complete car loan guide for first-time buyers

You’re buying your first car and you’ve got a lot of things on your mind – but you may not have considered how you’ll pay for it. Finding a car loan can be tough if you have a limited credit history, but options like bringing on a guarantor can help you qualify.

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Will I be able to get car finance?

Potentially, but it will depend on your circumstances.

Lenders should only ever lend responsibly. That means looking at your regular income and outgoings to see if there’s enough left over to comfortably service the loan you’re applying for. If you have a stable, dependable income and have worked out how much you could afford to repay each month, there’s a likelihood that a lender would do similar sums and come to a similar conclusion.

However, lending responsibly also means looking at your credit record to see if you have a history of using credit responsibly. If you’re young and haven’t used many credit-based financial products, your credit file is likely to be pretty limited, making you a riskier bet for a lender. That doesn’t necessarily mean you won’t get a loan, but it does generally mean that the loans you’d get approved for would likely be smaller and have a higher rate of interest.

The good news is that most lenders offer “eligibility checkers” which can tell you your chances of getting approved before you apply and without affecting your credit score. Additionally, a good broker or matching service should be able to check your eligibility with a wide range of lenders in one go – saving you time and, potentially, disappointment.

Finance options for first-time car buyers

If the bank of mum and dad is closed right now, here are some options to consider:

• An unsecured, fixed-rate personal loan. A personal loan is a very common method of financing a car purchase. They’re available from high-street banks and online lenders, and there are plenty of specialist lenders around that serve “non-standard” (read “bad or limited credit”) borrowers. If the loan has a “fixed rate”, it means that the interest rate won’t change during your loan, so you’ll know in advance exactly how much you’ll pay each month and overall.
• Hire purchase. With hire purchase you’ll need to put down a deposit (normally at least 10% of the vehicle’s value) and you’ll then pay the remainder off over one to five years. The credit is secured against the car, so if you fail to keep up repayments you stand to lose the vehicle. In fact, you won’t actually own the car until the final payment has been made. These deals are normally arranged by the dealership, which means that they tend to be more competitive when you’re buying one of their new cars, as opposed to privately buying a used car.
• Personal contract purchase (PCP). With personal contract purchase you make monthly payments, and then at the end of the agreed period either make a balloon payment to purchase the car outright or give the car back. Because of the balloon payment at the end, your monthly payments are lower than with hire purchase.
• A guarantor loan. With a guarantor loan, a friend or relative promises to step in and pay off your loan if you fail to do so. Interest rates on these loans aren’t fantastic, but sometimes they can be better than you’d get if you applied on your own.

You could even pay for your car using a credit card. It’s not quite as mad as it sounds, but that’s only if you have the self-discipline to use the card correctly and, crucially, if you can get approved for a long enough 0% purchase deal, with a high enough credit limit (which is likely to be extremely tricky if you don’t have much in the way of credit history).

Realistically, for most first-time buyers, a credit card won’t be a sensible or realistic approach to financing a vehicle purchase.

Tips for financing your first car

1. Don’t just accept dealer finance without comparing your options. Be wary of pushy car dealerships that want you to sign on the line there and then for their finance deals (which will naturally earn them a commission). Buying a car is a big move with long-term financial implications, so it’s important to shop around.
2. Get to know your credit score. There are numerous services that can offer you visibility of your credit score for free. To access your full report, you’ll normally have to pay a little each month. Once you know your score, you can look at ways of improving it.
3. Put down a large deposit (if you can). By reducing the amount you need to borrow, you’ll be less of a risk to lenders and the loan will cost you less.
4. Look at the overall cost of each option. A great rate is one thing, but once your loan has been spread over a number of years, or once the fees have been taken into consideration, that rate might not be giving you the full picture. Always look at the total cost of borrowing. Naturally you want to keep this as low as possible, while ensuring you can comfortably afford the repayments.
5. Use “eligibility checkers” or a “matching service”. These days, you don’t have to simply apply for a car loan and hope. Lenders offer “eligibility checkers” which can tell you your likelihood of getting approved before you apply, without affecting your credit score. What’s more, a good broker or matching service will be able to check your eligibility with a range of lenders in one go.
6. Consider applying with a guarantor. You might not have much in the way of credit history, but maybe a friend or relative who has excellent credit would be willing to act as your guarantor – helping you get your application across the line.

Bottom line

Your first car loan may not be the cheapest financial move, but it’s one that can make a difference for years to come. The good news is this loan will build your credit, making future loans that much easier to qualify for.