There are several factors to consider when it comes to borrowing money for a car purchase. First, there is the question of how much money is available to you. If you are fortunate enough to have a large lump sum, allowing you to buy the car outright, that’s ideal. For many people though, buying a car will involve some sort of borrowing, and one option is to take out a car loan.
So, how much can you borrow?
In part, the answer to this question will depend largely on the type of loan taken out. There are two main types of car loan – a personal loan or a fixed sum loan. The type you choose, as well as your income, determines how car loans are calculated.
A personal loan is a viable option if you have a good credit rating and can prove that you can afford the repayments. With this type of loan, you own the car right from the outset, and there are no restrictions on what you do with it. You will need a good credit score to get a favourable rate of interest.
If you want to buy an older car or high-mileage vehicle, a personal loan might suit you as it’s not secured on the car. A personal loan is also suitable if you want to make modifications to your car.
Fixed sum loan
A fixed sum loan differs from a personal loan because the car is named as an asset in the terms of the finance plan. This means that you cannot sell or otherwise dispose of the vehicle until the loan has been fully paid back.
The fact that the car is treated as an asset by the lender has a distinct advantage. If there are any issues with the car during the first six months of ownership, the lender can assist by offering support.
Like with a personal loan, the car belongs to you from the beginning. You pay a fixed sum over a set length of time, so you know exactly what to budget for.
How much you can borrow
With both types of loan, the lender will calculate how much they are willing to lend based on your income. They will then apply the interest rate – or Annual Percentage Rate (APR) – to work out how much you will pay.
So, the loan is worked out by adding the sum borrowed to the APR to reach the total sum you will repay. You can see what repayments would be using our car finance calculator.
The loan term
What you pay per month also depends on the term of the loan. If you take out a car loan over three years, for example, it means you will pay more per month than if you had opted for a five-year term.
What you need to consider
There are three main factors that come into play when it comes to deciding on whether to opt for a personal or fixed term car loan.
How long you will have the car
First, you need to think about how long you are likely to have the car for. If this may be a relatively short-term purchase, then perhaps it’s best to avoid a fixed-term loan to ensure you are free to sell on or dispose of the car whenever you wish. A personal loan is better suited to those who do not want to commit to a set length of time.
Your credit rating
If you have a good credit score, then personal loans offering the best rates should be available to you. If it’s not so good, a fixed term loan might be a more realistic option.
How much you can pay per month
It’s wise to make your own calculations regarding this, rather than solely relying on the advice of a lender. Add up your income, then deduct all other outgoings to see how much you have left for loan repayments each month.