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Should I get a loan for my first car?
Now you’ve passed your test, you might be looking to buy your first car to take your independence to the next level. Having a car can open up endless possibilities, but you need to think carefully about how you’re going to finance it in the first place.
Here we hope to give you some hints and tips on whether or not you should get a loan when looking to buy your first car.
Ask yourself why you’re getting a car
First of all, you should identify what your car is going to be used for. If public transport isn’t an option, you might need a car for work commitments. You might be about to start a job that requires you to drive, or you simply might not be able to commute to work without one. In this case, taking out a loan might be appropriate if you can’t realistically afford to buy a car outright.
Are you being realistic?
However, if you’re looking to buy a car for other reasons, such as ease of travel, impressing your mates or just getting an upgrade on what you could normally afford, you may wish to hold off for now. Consider saving up for your car first instead, as although you may have to wait longer to receive your keys, it will work out cheaper in the long-run. If you choose to save instead, you won’t have to pay any interest and you’ll be able to buy the car with cash (which might help you get a great deal too). Remember even if don’t have time to save up all you need to buy a car, the more savings you can amass, the less you’ll need to borrow – and repay.
If you do decide to borrow the money to buy a car, remember that you won’t just have to find the money to repay your loan each month. You’ll also need to factor in the ongoing running cost of your car. Of course you’ll need to insure it (which can be very expensive for new drivers), you may need to pay car tax (depending on the type of car), then there’s the ongoing cost of maintenance and MOTs, and fuel.
Before you take the plunge it’s important to work out your budget to ensure that your finances will stretch to covering the repayments and the running cost. Falling behind on any sort of loan may mean that you incur additional interest and charges, as well as damage your credit record. This can make it harder – and more expensive - to borrow again in future.
To help you make up your mind try running a few insurance quotes on a price comparison site to get a feel for the cost to insure the type of car you are thinking of.
Where are you buying your car from?
If you are planning on buying a new or second hand car from a dealership then you may find that they have their own finance options available to you – which could include loans, hire purchase or perhaps even contract hire. Before you commit it is worth comparing the APR that you are quoted to borrow from the dealer with the APR you would pay if you took your own loan out.
If you plan to buy a second-hand car from a private dealer, they won’t have any financing options of their own. In this case if you need to borrow you’ll need to arrange your own personal loan before you go out looking for your new run-around. Once you have taken out your loan, you’ll be able to shop around as a “cash buyer”.
Have you borrowed money before?
If you’ve only recently turned 18 its unlikely that you’ve borrowed much in the past, and therefore it is unlikely that you’ve had time to build up a credit history. Lenders use your credit history to help them decide whether or not to lend to you. Having no credit history means that they don’t have a lot of evidence on which to base their decision – which may make it hard to get a loan.
Don’t despair, there are ways that you can start to build a solid history of using credit responsibly – such as by taking out a “credit builder” credit card.