If you’re a young driver, securing finance can be a daunting task. Even more so if you haven’t owned a car before.
One of the reasons this is difficult is because it is likely that you have little to no credit history. Credit checks are one of the main ways a lender will judge whether you qualify for finance or not. Therefore, lenders are wary about approving you for a finance deal because they have no inclination as to whether or not you’ll be able to make the payments.
This also means that lenders and dealerships consider young drivers to be a higher risk. Not that this means that car finance for younger drivers is insanely expensive. It just means that securing car finance becomes a little bit more complex.
We talk to quite a few young drivers, and we guide them through the car finance process to ensure that they can get car finance. So we’re going to do the same in this article.
What Finance Options Are There For Young Drivers?
There are three options available that are viable for young drivers and those are;
They are all very similar but there are some key differences.
Essentially, a hire purchase is where you make a series of monthly payments for a set period of time. When that time is up, you own the car. If you default on a payment, the company is within their power to take the vehicle back. This will also show on your credit history.
Personal Contract Hire is where you essentially rent a car for 1 to 5 years. Once the time is up, you can hand the car back with nothing else to pay.
Personal Contract Purchase, however, has more options when it comes to the end of your agreement. You pay a fixed monthly fee for a period of time and once that time is up you have three options;
- You can keep the car if you pay off the MGFV
- The MGFV is the Minimum Guaranteed Future Value.
- This is the amount of money the car is expected to be worth at the end of your contract. It’s set at the beginning of the contract and is determined by the number of years you are keeping it for and the mileage you are expected to drive.
- Hand it back and get a new one (subject to mileage and the condition of the vehicle).
- Or, part-exchange the vehicle and use any equity to pay for another deposit.
What Are the Pros and Cons of a Hire Purchase?
Some of the advantages to hire purchase are;
- You own the vehicle
- The loan is a fixed rate loan
- If you choose a balloon payment, you can reduce the monthly costs
- There are no mileage restrictions
But, of course there are disadvantages, and those are;
- The monthly payments are higher than on a lease or personal contract purchase.
- The finance house technically own the vehicle until the final payment has been made.
- Because of that reason, insurance has to be fully comprehensive.
What are the Pros and Cons of Personal Contract Hire?
Some of the advantages to personal contract hire are;
- You don’t have to worry about depreciation
- There’s no risk of negative equity
- Low monthly rentals
- The road tax is usually included
However, there are obviously disadvantages to personal contract hire. For example;
- You don’t actually own the vehicle
- You could be subject to mileage and condition charges if you go outside the contracted terms
- There are extra costs you have to think about such as servicing. You can read our article on the hidden costs here.
What Are the Pros and Cons of Personal Contract Purchase?
There are also advantages to personal contract purchase. For example;
- Because you have three options at the end of your agreement, it’s flexible
- Your end payment is pre-agreed at the start of your contract
- If you want to, you can hand the car back (again, subject to mileage and car condition)
- It’s cheaper per month than hire purchase
However, there are some disadvantages. Those are;
- It tends to be more expensive than contract hire
- On a personal contract purchase, the interest rates tend to be higher
- You’re responsible for taxing the car
- If you do want to hand the car back, you will be subject to mileage restrictions and fair wear and tear.
Can I use a Guarantor to Get Finance for a Car?
If you are in employment, then you have a better chance of securing car finance. However, you can help seal the deal by using a guarantor.
What is a Guarantor?
A guarantor is someone who agrees, in the event of a default, to take on your payments.
Who Can I Use As a Guarantor?
A guarantor is an adult (21 or over) who has a good credit score. This can be a family member, friend or work colleague. Your guarantor will have to provide proof of ID, bank details and, on occasion, bank statements.
Finance and leasing companies are often better persuaded to approve car finance if you get a guarantor. Of course, being a guarantor carries some serious responsibility; therefore it’s something you should take some time to consider.
We’ve only touched upon using a guarantor but you can find out more in our article dedicated to using a guarantor to get car finance.
How Much Will My Deposit Cost?
It’s not uncommon for younger drivers to be asked to put down bigger deposits when it comes to getting approved for car finance. Sometimes the deposits can be as big as 30%.
This is because the lender needs some sort of assurance that you will be able to make your payment, and if you did not pay, that they could get their money back by selling the car.
Ultimately, however, it’s down to your ability to pay and what sort of car you are looking at.
Are There Any Other Options Other Than Car Finance?
Car finance can be stressful enough as it is, so being a young driver on car finance can be extremely stressful. So there is another option, which is probably the most popular among young people and that is buying a car outright.
In conclusion, young drivers can get car finance. But, it will be more difficult for a number of reasons. Due to the little or non-existent credit history; it makes it harder for lenders to know whether you will make the payments. However, this can be helped by having a guarantor.
But, it’s important to remember that being a guarantor comes with a lot of responsibility, so it’s not something that you should go into halfheartedly. Above all else, it’s important that you speak to a trustworthy broker before making any major decision.
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