Open Banking helping Young Drivers get Car Finance
Intro
Can you remember the first time you got a bank card as a kid? It felt like the world was in your hands! No longer stuffing your birthday notes down the back of the bed: somewhere safe from prying siblings.
Sadly, the novelty of banking has probably moved on, and it’s not something many of us get too excited about.
Banking nowadays for young people seems to consist of trying to apply for credit to help pay for something and be declined because we don’t have a credit history…but can’t get a credit history because no one will accept us.
Fortunately, that’s where open banking is helping. This new banking method means that finance providers can take a detailed look at your bank statements and are less reliant on credit history.
Open banking has proved so powerful, particularly essential financing such as financing your car to get you to work!
This article will dive into open banking and make it as simple as possible.
Why would I use open banking?
In terms of the benefits to you, open banking can bring all of your accounts into one place. For instance, you could check your current bank account and see your credit card balances on the same app.
Open banking is becoming increasingly common, with more banks and financial institutions creating partnerships with innovative app creators.
Broadly speaking, enrolling in open banking gives banks the ability to share your financial data. While this might sound scary, it can help get access to credit and financial services.
For instance, you might connect your account to an app that looks at your spending.
In turn, it recognises that you’re putting money into a savings account…however, there’s a savings account with a better rate!
The app then informs you of this, and you can make a better financial decision.
Open banking in terms of car finance:
You might contact a broker and request a car finance quote. Instead of just relying on your credit rating (which might not tell the whole story), the broker realises you’re on open banking. They use the same partnership app available on your bank, so they can use a service to assess whether you can make the payments for your new car.
Do I need a good credit score for open banking?
Open banking isn’t a separate service from your regular bank account – it’s just a feature offered. So if you can open that bank account, you can enrol in open banking.
Unfortunately, you might need a credit check for opening certain current accounts. Also, some bank accounts require you have your salary paid in monthly.
As a young person, you’ve probably been in the ‘credit score’ trap. Where you know you need to build your credit score…but everything you apply asks for a good credit score!
Open banking is helping young people to break out of that trap. By taking out a finance loan thanks to open banking, you’re building an excellent credit history that will serve you well in the future.
For instance, if you take out a 3-year loan on a car finance deal, make every payment, hand the car back and ride off into the sunset – then that’s three years of showing that you can manage money responsibly. A good history can help you get lower interest rates in the future and even a better mortgage deal!
Does everyone have access to open banking?
Not every bank currently uses open banking. But if it does, and you’re accepted for the account, you can opt in to open banking.
To opt into it, you need to sign up for one of the apps. You’ll then have to accept the consent for it (make sure you read the fine print, so you know what you agree to).
For instance, if you decide to use an app that tracks your spending and recommends credit cards that might suit you well, you need to opt into this app. Each bank does this differently, but there’s usually a tab on your online/mobile banking that lets you apply for these services.
If you don’t use online or mobile banking, you can’t use open banking.
Do I have to pay for open banking?
Nope! Open banking is an entirely free service. In reality, you’re doing the third-party providers a favour.
For instance, if open banking means that you end up with an outstanding car finance loan on a shiny new car, then you’re helping out that business. That’s a sale that they wouldn’t otherwise have gotten if they had relied purely on credit rating.
Is open banking safe?
Yes! Open banking is extremely safe.
Security is the absolute priority for financial institutions. Using bank-level security lets you rest easy, knowing that the software and software systems are constantly tested.
As with all banking, you’ll never be asked to give your bank login details or password. A bank will never ask you for this.
Financial watchdogs regulate open banking. Data-protection laws also protect you and the Financial Ombudsman Service: this means in the unlikely event that fraudulent payments occur that your bank can pay you back
Can I opt out of open banking?
You sure can – you have no obligation to enrol in open banking. Simply put, it’s your financial data, and you can do what you want with it! You have to actively permit each new provider (say, a new app) to view your accounts. You will have to consent to the provider, and they will contact your bank: which will also look at it. Likewise, if you change your mind, you can withdraw your permission.
What are the pros of open banking for car loans?
As you’ll know, getting accepted for a car loan as a young driver can indeed be a nightmare. You might be early on in your career or still, looking for student car finance – either way, you might still need a car! And knowing you can afford the car can become incredibly frustrating if you don’t have the credit history to back it up.
Open banking opens this door for you. By utilising open banking with car loans, you can show your complete financial picture providing the lender with a more detailed and accurate view of your financial history.
You might earn more than enough to afford your car – but you don’t have long enough credit history to get the finance. With open banking, this wouldn’t matter.
Using open banking also means that you can start building a credit history for the things that matter, like buying your first home.
Here are a few testimonials from our Young Drivers to help show the benefits of open banking.
‘I really needed a car to get to my new job, as the public transport near me isn’t reliable. I’m 18 and don’t really have a credit rating. But because my bank account has open banking, I was able to get approved for a finance deal from Car Finance 24/7’
Eric, 18
‘I didn’t realise what open banking was, but the process was straightforward. I just had to consent to data access, and I was offered a deal in minutes. I was really nervous as I don’t have much on my credit history, and my car was a write-off. Now I have a reliable car that I can afford!’
Sam, 20
What do car loan providers look at on your bank account?
Open banking takes a detailed snapshot of your spending habits. Don’t panic, though – they won’t be judging you for spending £20 on Uber Eats on a Monday night. They’re looking for broad strokes and alarm bells: everyone spends money, so don’t worry about that.
Financial service and app providers will be looking at:
Income: how much you earn each month: Includes full or part-time work and any loans you’re entitled such as education and cost of living loans if you’re a student. They’re also looking at the frequency. For instance, if you get paid £100 one month, then £1000 the next – it can be challenging to assess whether you can consistently afford a car loan.
Financial commitments: Payments you have to make each month (or face severe penalties) such as your mobile phone contract or rent. If your financial obligations are low, you’ve got a good chance of getting accepted for finance.
Your spending habits: This is your general spending that can show how responsible you are with money. Again, the providers aren’t looking to snoop on from where you buy your clothes. Mostly, they’re looking for ‘alarm bells’.For instance, if you get paid on Monday and blow 50% of it on sports bets by Wednesday, this is a negative spending habit!
What car finance companies use open banking?
The leading and most reputable car loan company using open banking is Car Finance 24/7.
This company can use open banking for two things.
- They can assess whether you can comfortably afford a car finance loan within minutes by accessing your banking history. If not, they can advise on a better, or more appropriate, deal for you.
- They can help you with payments in times of crisis. For instance, if you have a financial disaster and need a payment holiday, Car Finance 24/7 can hop on, verify this, and (hopefully) cut you some slack. This could mean extending your contract by two months and giving you a payment holiday.
What banks are currently using open banking?
Open banking is getting popular, so, likely, every current account will eventually offer it!
Here’s a quick list of the most popular UK banks that currently offer open banking.
- Bank of Ireland UK
- Bank of Scotland
- Barclays
- Citibank UK Limited
- Clydesdale Bank
- HSBC
- Lloyds Bank
- M&S
- Monzo
- Nationwide
- NatWest
- TSB
- Sainsbury’s Bank
- Santander
- Starling Bank
- Tesco Bank
- The Co-operative Bank
- The Royal Bank of Scotland
- TSB Bank
- Ulster Bank
- Virgin Money
Summary
Open banking is arguably the most significant change to how we bank since credit scores came into existence.
Fortunately, it helps us, young drivers, out: it means that we won’t get constantly turned down due to a light credit history. It also means we can take advantage of the best deals on offer and get the best bang for our buck!