Car Finance for Students

Hire Purchase (HP) car finance is one of the most popular types of student car finance. It’s a type of loan that’s secured against the car. You’ll typically need to put down a deposit (although no deposit options are available) and then borrow the outstanding purchase price of your new or used car.

HP loans can last between one and six years; throughout that time, you’ll need to make regular monthly repayments. Once you reach the end of the loan term and pay the small ‘Option to Purchase’ admin fee, you’ll become the car’s legal owner.

This type of car loan might have higher monthly repayments than other types of finance but can be more accessible to people with poor credit scores.

Personal Contract Purchase (PCP) is an alternative type of car finance that works much like HP finance but offers more options. Instead of owning the car at the end of the loan term, you can return it to the lender or use any positive equity as a deposit in a new deal.

This is because, unlike HP, you won’t have to borrow the full purchase price of the car with PCP. After putting down a deposit, you’ll only need to take out a loan that covers the difference between the car’s current value and its predicted future value at the end of your loan term. This is also known as the car’s depreciation, the difference between its price and the Guaranteed Minimum Future Value (GMFV).

PCP loans typically last between two and four years. If you want to buy the car at the end of the loan term, you’ll have to pay the remaining value, often called the balloon payment. Monthly repayments can be lower with PCP than HP, but you may need a good credit score to qualify.

Personal loans are a less common choice for students as they often require good credit scores to qualify. This is because, unlike PCP or HP, personal loans aren’t usually secured against the car. It’ll be all yours as soon as you use the loan to pay the car’s seller.

You’ll still need to make monthly payments, plus interest, for an agreed period, but as the car’s legal owner throughout, you can sell, modify, or part-exchange the car at any time.

Having no collateral securing the loan makes it a riskier option for lenders, which is why personal loans are usually restricted to those with a good or excellent credit score. They may also come with higher monthly repayments than alternative types of finance.

Your credit score is a three-digit number that lenders use to understand how you act as a borrower. In the UK, it’s calculated by three different credit reference agencies – Experian, TransUnion, and Equifax – and your score could be different with each one.

However, credit scores are never fixed. They can increase and decrease over time, depending on your actions. It’s not an exact science, but there are steps you can take to improve your credit score:

• Register on the electoral role
  Ensure you’re registered on the electoral roll every time you move house. This is entirely free and can be completed online in a matter of minutes. No matter whether you’re only in your student house for one year, it’s well worth registering. Not only will this allow you to vote in local elections, but it can also boost your credit score.
• Apply for any credit
  While you should never take out credit that you can’t afford to repay, starting with something small, such as a mobile phone contract or a credit card you pay off each month, can help you build your credit score. The most important thing to remember is to make sure you don’t miss any payments; make them in full every month, and you should gradually see your credit score increase.
• Check your credit report regularly
  Checking your credit report is a good habit to have – and it’s completely free! You can find out your score with each of the three credit reference agencies by opening accounts with Credit Karma, ClearScore, and Experian. You’ll also be able to see the details that lenders will see, including your payment history and any hard or soft credit searches. If you spot any mistakes, contact the credit reference agency straight away to get them fixed.

If you have a timetable with room for a part-time job, having a regular income on your finance application could improve your chances of being approved for a loan. It’s an indication that you’ll be able to afford your repayments and won’t need to rely on a guarantor to step in.

The most convenient student jobs are those that can fit around your studies and still leave you plenty of time to focus on your assignments. While more irregular work can be difficult to quantify, if you regularly earn from side hustles or remote freelance jobs, you may be able to use your recent bank statements to prove that this is also reliable income that you can put towards your loan.

Affordability is an important factor that lenders consider when checking your student car finance eligibility. The more you understand your budget, the more likely it is that you’ll apply for a loan that will be affordable – and a used car to match! Getting your heart set on a nearly new BMW or a flashy supercar with extra features that are way out of your price range will likely leave you disappointed.

When working out your budget, make sure you include all the potential costs, not just the car’s purchase price, including:

• Road tax
• MOT and service
• Insurance
• Fuel
• Repairs