Before You Apply for Car Finance: Everything you need to Know
Identify your car priorities
There’s no one-size-fits-all when it comes to car buying; every driver is different and wants different things from their vehicle. Before applying for car finance, take some time to list out your priorities. This can help you not only by narrowing down the makes and models that might suit your needs, but also by determining the type of car finance that would be the best fit for you.
You might be someone who wants to spend as little as possible and get a loan to buy a cheap, reliable used car that’ll take you from A to B. Or perhaps you work in sales and need to travel a lot of long distances each week so you need a car – and a finance agreement – that can cope with this large milage. Maybe you’re a car enthusiast who wants to buy the latest model with a high-end spec that’ll turn heads every time you park up.
The more you understand what’s important to you, the easier you’ll find it to choose a car and finance deal that aligns with your priorities.
Understand the types of car finance available
There are several different types of car finance available, and the right option for you will depend on many factors, including your financial situation, how much you want to borrow, how you plan to drive your car, and whether you want to own your car.
While not all lenders offer every option, the most common types of car finance in the UK are:
Hire Purchase or HP
Personal Contract Purchase or PCP
Personal Contract Hire (PCH) or Leasing
There are also different types of car loans designed for people with bad credit scores, no credit history, or more than one applicant. These car finance options include:
Before applying for car finance, it’s well worth taking some time to understand each of these options, their pros and cons, and how they work before, during, and after the agreement ends.
Plan your long-term budget
Taking time to understand your finances and plan a budget is a good step to take when considering applying for car finance. Don’t just think about how much you can afford right now, a car loan can last up to six years, so it’s important to think about your long-term financial situation.
To calculate how much you can afford to spend on a car, make a list including its purchase price and all its running costs. Next, work out how much you’ll need to budget each month:
Divide the total loan amount by the number of months you’ll be making repayments
Add the cost of a month’s driving insurance
Add the cost of a month’s vehicle tax
Add the cost of a month’s worth of fuel
Add the cost of your monthly maintenance (including MOT, service, and repairs)
Keep in mind that you might be able to reduce the amount you need to borrow by part exchanging your current vehicle or putting down a larger deposit upfront.
Find out how to work out the cost of owning a car
No matter your budget, don’t commit yourself to a loan with repayments that are more than you can afford. The lender will typically check your affordability before offering you a loan, but making the calculations so you have a clear budget in mind before applying for car finance can help improve your chances of finding a loan approval.
Check out our car finance calculator to get an estimate of what your monthly loan repayments could look like.
Check your credit score
Checking your credit score regularly is a good financial habit to adopt, but it can be essential to know where you stand before you apply for car finance.
While it’s not the only factor that lenders consider, your credit score can play a key role in whether your car finance application will be approved, how much you can borrow, and what APR you’re offered.
It’s also worth remembering that too many hard searches on your credit report in a short time can harm your credit. At Autedia, when you apply for car finance, we’ll run a soft credit check to see if we can find you an approval in principle from a panel of lenders. A soft check shouldn’t affect your credit score. It’s only if you choose to proceed with a loan option that a hard credit search will take place.
Prepare your paperwork
Before you apply for car finance, it’s worth gathering some paperwork so that it’s ready to submit.
Some lenders may request different documentation, but you’ll typically need to supply:
Learn some car finance jargon
Let’s face it; the world of car finance is full of jargon. At Autedia, we try to avoid stuffing our articles with endless acronyms. However, there are still a lot of standard industry terms you’ll see pop up and may be asked about during your car finance application.
Before you apply, have a read of our jargon buster, which is designed to help you get to grips with the most frequently used terms including:
What is a balloon payment?
How is GMFV calculated?
What does APR mean?
Shop around
Before applying for car finance with one lender, consider shopping around. When you apply with a car finance broker like Autedia, you only need to submit one application to find the best deal from a wide panel of lenders. This lending panel offers a range of different types of car loans with different interest rates so that borrowers with all circumstances can be considered.
Not only will you have access to more than one lender, but you also won’t have to undergo a hard credit check to find out whether you might be eligible for a loan. Instead, a soft credit check will be carried out, which will be listed on your credit report but won’t be visible to other lenders. That means even if we’re unable to help you find a loan this time, your credit score won’t be impacted. A hard credit check will only take place if you choose to proceed with the loan option offered.
Be honest
While it might be tempting to inflate your monthly earnings slightly or state that you’ve lived at the same address for more than three years when you’ve only been there two, being dishonest on your car finance application will only harm your chances of being approved in the long run. Most lenders will ask for proof of the information entered in your application form, including proof of address and income.
Not only is it fraudulent to be dishonest when applying for a car loan, but if you were to be successful, you could end up with an agreement that isn’t affordable and can cause bigger financial problems if you default on the loan.
There are lenders available who can offer car finance to people with various circumstances, including those with bad credit scores, young car drivers, and those who have been refused elsewhere.
Ask questions
Don’t be afraid to ask questions during the car finance application process. With Autedia, you’ll be paired with a dedicated account manager. Their job is to help guide you through the car finance process, answer any questions you might have, and help you communicate with the car dealer and lender. There’s no such thing as a stupid question; the more you know during the application process, the better informed you’ll be before making a final decision.
Even if you’re at the stage of signing your agreement, make sure you read through it properly and understand all the terms and conditions. If you have any concerns or any of the points are unclear, ask your account manager to explain so you know exactly where you stand and what you’re agreeing to.
What is the approval process for getting car finance?
Different lenders have different eligibility requirements that they can consider, but the first step in the approval process for car finance will typically be a soft credit check and affordability check.
If you’re offered approval in principle and decide to proceed, a more detailed hard credit check will take place. At this stage, the lender may also ask to see proof of the details submitted, such as your proof of address, ID, and income. Further details may also be needed if your situation is more unusual, such as if you’re making a guarantor finance application or looking for self employed car finance.
Once all the checks are completed, you’ll be given a copy of your full car finance agreement to review and sign.
How long does it take to get a decision on car finance?
With Autedia, you can get a car finance decision in minutes. As soon as we receive your completed application, we’ll get to work to find you an approval in principle. You’ll then receive a phone call from your dedicated account manager to talk next steps.