Millions of people love to own the latest model but cannot afford the up-front cost. Thanks to financial institutions which have personalised deals to finance your dream car, not to mention car dealers are also in this race. While banks and private lenders offer auto loans, a kind of personal loan subject to collateral that your car itself serves, car dealers provide hire purchase (HP) and personal contract purchase (PCP), in other words, car financing options.
Seeing the rise in financing applications, the lending world has become a bit flexible to speed up the process. Like lenders, banks have also come forward to allow online facilities from filling in the application to submission of documents like your identity card, bank statements and the like.
In times gone by, car loans were popular after buying outright. A huge deposit and a loan from a bank or a lender was the only way to finance a car in case you were unable to pay for it outright. Still, after the financial crash, the lending industry brought in a new way known as PCP that allows for a small deposit and smaller monthly payments towards the depreciation coupled with monthly interest.
Car financing is expensive when your credit score is not up to snuff. Lenders will seek a higher deposit, which will be at least 15 to 20%, and in spite of that, the interest rates will be high. The implications of poor credit scores are also bad if you seek HP or PCP from a car dealer. Here are the pros and cons you should weigh up before seeking bad credit car finance:
- It spreads the cost
You do not have to worry about eating up your savings or having enough money stashed away to buy your dream car. Bad credit car finance will split up the cost. A deposit is still a must. It is generally at least 10%, but you will need to make it to 20% in case of a bad credit score.
If you need to buy a car for your business, financing makes more sense than an outright purchase because it will not affect your cash flow.
- You can maintain your monthly budget
Regardless of the financing option, you will be able to smoothly maintain your budget as you know what amount of money to pay down every month. All financing options are subject to fixed interest rates, so there is no scope for unexpectedness. The repayment length will be decided based on your present financial circumstances so you can easily meet other expenses without missing the payments.
- It helps do up your credit rating
Although loans for bad in Ireland are expensive, they pave the way for getting loans at affordable interest rates down the line. If you stay committed to payments over time, your credit score will improve because your lender will report on-time payments to credit reference agencies. This happens only if you do not miss even a single payment. Bear in mind that this cannot drop off the previous defaults, but it will show that you have a sense of financial commitment.
- Interest will be high
Whether you take out dealership finance or a personal loan, interest rates will be quite high because of a poor credit score. It is important to check the APR and interest rates charged by multiple lenders, so you choose the best deal.
Dealership financing could be even more expensive as it involves hidden charges. PCP will charge you extra fees if you cross the mileage limit, and if you decide to own the car, you will have to make the balloon payment at the end of the contract, which means you will own it by paying double the market price of the car.
- You will have to stretch your monthly budget
Even though the sticker price of the car is spread out over some time, a monthly instalment will eat away a sizeable amount from your disposable income. As a result, you will be left with little money to get by. This could cause your budget to blow up, and eventually, you will end up borrowing money for your essential expenses from your lenders. If this cycle continues, you will find yourself in a debt trap.
- The risk of repossession
Although you are free to use your car however you want, your lender still has the upper hand. In the event of a default, they will take back your car. With dealership finance, you cannot own the car until the contract ends, so you will lose it.
- Bad impact on the guarantor or co-applicants credit score
Although you can get the nod for car finance when your credit score is not up to scratch, your lender or dealer may ask you to arrange a guarantor or bring a co-applicant. Now, the credit report of both of you will be perused. In case you make a default, the credit score of the joint applicant or the guarantor will also be affected.
The bottom line
Every loan has its upsides and downsides. You need to carefully evaluate whether a loan serves the purpose you want to take out. As a sensible borrower, you should carefully examine your financial condition never to miss any payment.
Check your repaying capacity using an online calculator. You can get an idea of the estimated cost of the car it would cost you. Assess if you can manage to get by after taking on the burden of car payments. Though a lender will determine your repaying capacity before giving the nod, remember that if you fall behind on payments, the only person who will be blamed and face the ramifications is you. If you are looking for dealership financing, make sure you understand how it works and compare its benefits and drawbacks with that of auto loans from direct lenders.