Step 1: Assess your financial situation

Before you kickstart your loan application, take a good look at your financial health. Crunch your numbers and decide how much you can afford to pay each month while maintaining a comfortable lifestyle and keeping up with other financial responsibilities. Don’t forget to include other car-related expenses such as insurance, maintenance, and fuel.

It’s worth checking your credit score, which will play a significant role in the terms you might receive and your interest rate. A higher credit score can unlock more favourable loan conditions.

Step 2: Choose the right vehicle

Be mindful that your choice of vehicle can influence your loan terms and overall chance of approval. Older models or cars with high mileage might be harder to finance as they’re considered less reliable. Settling on a few options before approaching lenders can help streamline the used car loan process.

Step 3: Shop around for the best deals

Don’t accept the first loan offer you receive, even if it seems like a great deal. Compare rates from different lenders, including high street banks, credit unions and specialised auto finance companies. Working with a broker can be a great way to expand your horizons and shop around for the best deals when navigating the used car loan process.

Step 4: Understand the terms

It’s important to understand all the terms and conditions of your loan. Look beyond monthly payments and evaluate variables like interest rate, loan duration and any fees associated with early repayment or late payments.

Longer loan terms can make monthly repayments more affordable, but it’s important to remember that you’ll be making more payments and, therefore, paying more interest over time. Assess whether a longer car finance term is truly beneficial for you in the long run. To put things into perspective, the latest data from Experian reveals the average auto loan term for used cars is 67.4 months, while average car leases are just under 36 months.

Step 5: Finalise the loan and purchase your car

After choosing the best loan offer, it’s time to submit your paperwork. This typically involves providing proof of income, identity, and other key documents. Once the loan is approved, the funds are transferred directly to the dealership or your personal bank account, dependent on the type of agreement. You can then purchase your used car and get behind the wheel!

Step 6: Repayment and beyond

With the loan secured and the car keys in hand, focus shifts to repayments. Setting up automatic debits during the used car loan process can help avoid missed payments and potential fees. Consider making extra payments to reduce the interest amount and shorten the loan term.

Check out our fantastic online car finance calculator today to discover the right car finance for you.

Understanding car loans: the basics

Let’s start with the fundamentals. Car loans are a type of financing product specifically designed for auto purchases. They allow you to borrow a certain amount of money from a lender, which you then repay over time, usually with interest.

Choosing the right loan

When it comes to paying for a new car with a loan, one size does not fit all. Before applying, it’s essential to consider your individual circumstances and preferences. Here are some key factors to keep in mind when vetting lenders and loan products:

Loan amount: Determine how much you need to borrow based on your budget and the cost of the car, as well as any additional fees.

Interest rate: Shop around for competitive interest rates to ensure you’re getting the best deal possible. Variables like your credit score can impact the interest rate offered when paying for a new car.

Loan term: Agree on the length of the loan, keeping in mind that longer terms can unlock lower monthly payments but higher overall interest costs.

Additional fees: Ask about any additional charges, such as late payment fees. Some lenders may also charge extra for early repayments. Ask lots of questions to avoid unwelcome surprises down the line.

Types of car loans

When exploring car financing options, you’ll see various types of loans tailored to different needs. There are a few acronyms to decipher, but really, it’s quite straightforward, and there’s no need to be intimidated. Here’s a breakdown of the main ways of paying for a new car in the UK with a loan.

Hire Purchase (HP): With HP loans, you pay a deposit upfront (although there are plenty of zero deposit options too), followed by fixed monthly payments over the lifetime of the agreement. Once you’ve made all the payments, you own the car outright. HP is a clear-cut financing option suitable for those with an end goal of full ownership of the vehicle.

Personal Contract Purchase (PCP): PCP lowers monthly payments by deferring a significant chunk of the loan amount to the end of the agreement. At the end of the term, you can choose to return the car, provided the vehicle is in good condition and within the contracted mileage, trade it in for a new model or make a final ‘balloon payment’ along with a small option to purchase fee to own the vehicle outright.

Personal Contract Hire (PCH): PCH is similar to PCP but involves leasing the car rather than owning it. You pay fixed monthly payments for the duration of the lease and return the car at the end of the agreement. It’s a great option if you love to drive the latest models. However, PCH agreements often include mileage restrictions and wear-and-tear guidelines.

Personal Loans: Personal loans can be used for various purposes, including paying for a new car. You receive a lump sum of money from the lender, which you then repay with interest over time. Personal loans offer flexibility, but the options may be limited for those with a poor credit profile.

The application process: what to expect

Once you’ve done your homework and selected a suitable loan, it’s time to apply. Here’s what you can expect during the application process:

Documentation: Prepare requested documents, including proof of identity, income verification and details about the car you want to purchase.

Credit check: The lender will request a credit report to evaluate your status and set the terms of the loan. A healthy credit score can improve your chances of approval and result in more favourable terms, including lower interest rates.

Approval decision: After reviewing your documents and credit rating, the lender will either approve or decline your application. If approved, you’ll receive details about the loan terms, including the interest rate, amount, and repayment schedule.

Loan pay-out: Once you’ve accepted the loan terms, the finance company will transfer funds to the seller or dealership, allowing you to complete the purchase of your new set of wheels.

Paying for a new car: managing your loan responsibly

With the loan secured and a set of keys in your hands, it’s time to focus on repayments. Here are some tips for managing your loan responsibly:

Budgeting: Incorporate your loan payments into your monthly budget to ensure you can afford them comfortably. Prioritise your payments over other less-important expenses to avoid defaulting on your loan and dragging down your credit score.

Automatic payments: Consider setting up automatic deposits when paying for a new car. This will ensure your loan payments are made on time. This can help you avoid late fees and maintain a stellar payment history.

Extra payments: If possible, consider making extra payments towards your principal loan amount. This will help you pay off the loan faster and reduce the total interest paid.

Communication: If you run into financial difficulties or anticipate missing a payment, communicate with your lender proactively. They will be more understanding than you might think and can usually offer assistance or alternative payment arrangements to help you avoid defaulting.

Drive towards success with My Car Credit

Whether you’re looking to lease a brand-new Nissan Leaf or work towards full ownership of a used Toyota Highlander, paying for a new car with a loan can open new doors when it comes to getting behind the wheel. At My Car Credit, we’re riding shotgun to help you understand the basics of car loans, choose the right product for your needs, navigate the application process, and manage repayments responsibly – so you can get behind the wheel with confidence.

Try out our fantastic online car finance calculator to see an instant breakdown of your expected monthly payments, typical rate and total payable.