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How Do Car Finance Loans Work?
A car loan is a personal loan that is designed specifically for purchasing a new or used car.
Car loans are similar to unsecured loans in the fact that they do not require any property to be used as security on the loan. However, some car loans may be secured on the car you buy.
Who can take out a car loan?
Car loans are an available finance option for many people with a range of financial situations.
There are many car loan lenders that can help people who have a poor credit history and subsequently have a bad credit rating.
You do not need to own your home to take out a car loan, as they do not require any property to be used as security on the loan.
Car loan lenders and purchase options
When choosing a loan to purchase a new or used car, there are many different options available to you.
With a good credit history...
If you have a good credit history you can choose to take out any normal unsecured loan and use the loan to purchase the car of your choice. Normal unsecured loans can be beneficial for purchasing a car, as they offer lower interest rates, place no restrictions on the car you buy, you will however need to have a good credit history for a normal unsecured loan.
The Marks and Spencer car loan is an unsecured loan designed especially for purchasing a new car, they offer very competitive interest rates but do require a good credit history.
With a poor credit history...
If you know yourself to a have a poor credit history there is still a range of different finance options available for purchasing a car.
One of the more common options for people with a poor credit history is to go with a car loan specialist. Some car loan specialists will also provide the car you buy, though they do usually offer a good range of cars, including new and used cars.
Netcars is one car loan lender who specialise in helping people with a poor credit history get the finance they need for purchasing a car. Netcars allow you to choose the car you want and from the dealership you want to buy from too.
Car loan specialists do vary in the types of finance they provide for your car purchase. You can sometimes choose between a straightforward car loan, or you can also choose to purchase your car through a hire purchase, lease hire or personal contract purchase scheme.
Straightforward car loan
A straightforward car loan is simply an unsecured loan that has been specifically designed for purchasing a car. Often offered by car loan specialists, they will sometimes be secured upon the car you buy.
Hire purchase
Purchasing a car through a hire purchase finance option offers a fixed monthly repayment cost and fixed loan term. With hire purchase you will effectively be the car owner, however the title ownership will not pass to you until the car loan is repaid in full.
Personal contract purchase
A personal contract purchase for a car offers fixed monthly repayments over a fixed term, and there is a balloon payment at the end of the loan to help reduce the cost of the loan repayments. At the end of the car loan term you can choose to repay the balloon sum and purchase the car, or you can choose to return the vehicle to the leasing company, but you will not get your loan repayments refunded as you were in effect 'leasing' the car.
You can also choose to re-finance the balloon payment at the end of the car loan term, which is a more cost effective option for keeping your car.
Lease hire
Purchasing a car through a lease hire finance option is similar to a hire purchase plan, however with lease hire there will be a set balloon payment to make at the end of the loan term, which helps to reduce the monthly repayment costs.
Does the loan lender also provide the car?
When looking for a car loan you may have already found the car you want to purchase. If you have then you may not want to be restricted to a choice of cars provided by a specialist car loan lender.
Netcars is one car loan specialist who allows you to choose the car you want from the dealership you want to buy from.
Some car loan specialists provide the car you buy as well as the finance. They often have nationwide branches so it's easy to go and choose the car you want, and they will often offer a range of the most popular car makes and models to choose from.
Approved Car Finance and Creditplus are car loan specialists who also provide the car you purchase.
Are there any restrictions on the car you can purchase?
When taking out a car loan it's important to find out if the car loan lender has any stipulations or restrictions upon the car you are allow to buy.
Restrictions can be on the age of the car and also the mileage.
Do you need loan protection insurance?
When taking out a car loan you may want to consider also taking out loan protection insurance for your car loan.
Loan protection insurance will cover your car loan repayments if you become unable to work due to accident, sickness, unemployment, if you become a carer for a relative and also life cover too.
When using a loan to purchase a car, another aspect of loan protection insurance that is sometimes offered is a balancing payment on your car loan if your insurance company writes off your car.
It is important to find out exactly what cover is offered before you take out a loan protection plan for your car loan.
How long does it take to get a car loan?
Typically a car loan takes around the same time as an unsecured loan to be processed, which is usually between 2 and 6 weeks.
However, if you are also purchasing your car with the car loan lender, the loan process will be extended to include visiting the showroom and choosing the car you want to purchase.
The application process...
If you are going to purchase your new car separately from taking out a car loan you should remember to leave ample time for your car loan application before you commit any funds.
Applying for a car loan is a fairly straightforward process, you can fill out an application online on the car loan lender's website, and you will usually be contacted within 24 hours with a decision on your application.
Once you have been accepted for a car loan you may be required to product document proof of your income, including bank statements and payslips, and if you are self-employed you may need to provide your accounts and tax returns. If you are a new customer with the loan lender you may also need to provide documentation of proof of ID such as a passport or driving licence.
When your documentation has been received by the car loan lender you will be sent a loan contract which you will need to sign and return to the car loan lender.
Once the loan lender has received all your documentation and signed contract you can then go and visit the car showroom if the car loan also provides the car, or your loan funds will be transferred to your bank account so you can purchase a car. Loan transfers will usually take within 3 working days to reach your account.
Options for the future...
When taking out a car loan to purchase a new or used car it's important you find out what options are available to you in the future.
Should you wish to buy a new car and sell your existing car privately it's important to remember that you will still need to repay your car loan and this cannot be transferred to the new buyer.
If you take out a car loan with a specialist car loan lender who also provided your car, you may have the option of returning your car and re-financing the car loan to buy a new car.
Compare car finance loans
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