Boost The Odds Of 0% Used Car Finance

15/09/2016

Boost The Odds Of 0% Used Car Finance

You don’t have to look very far these days to see advertisements offering 0% or interest-free finance deals on various cars. 

But most of these are concentrated on buyers of new cars, for the very good reason that the dealer who is subsidising the deal - by letting the customer forego any interest payments on the money they borrow - can factor this into the profit it makes on the car when it eventually takes it back as part-exchange for another car, a few years down the line.

In other words, it’s a balancing act: the garage is foregoing its commission on the finance plan which it sells, in the hope that it can recoup that money when the buyer returns to trade in the car once their finance deal has ended.

And as most cars lose the biggest share of their value in the first three or four years of their life, it’s a little easier for dealers selling new cars to offer a zero percent finance package, because they know that the cost to them, in terms of the interest lost, is relatively small when set against the amount of its original value the car will have lost over that time.

As a result, the loss of the benefit of any interest paid can be factored in to the part-exchange value - or in the case of a lease-purchase of personal contract plan (PCP) arrangement, the guaranteed future value, of the car involved.

 

Low Interest Rates - A Blessing Or A Curse?

Even in our current climate, in which low interest rates which have already been with us for several years, and look likely to continue to prevail for a few more yet, car dealers and finance companies are being rather cautious about who they are willing to lend to, and the amount of credit they are willing to extend.

But this greatly helps those who are in a position to buy, because they can shop around for a good deal, and can even try to bag themselves a 0% finance package on a used car - especially if they are already a repeat customer with the dealer, or can persuade them that they are likely to want to become a repeat customer.

So in this article, we will run through the golden rules you need to try to satisfy to give yourself the best chance of landing an interest-free used car finance package.

 

Your Funding Choices

1. Hire Purchase

First, though, you should understand what a hire purchase agreement is, the main features of the main alternative, a personal contract purchase plan, and how the two compare.

Essentially, with a hire purchase plan, you hire the car while you are making the loan payments for it, and your payments meet both the interest charges on the loan, and a portion of the capital (the amount of money you have been loaned towards the car’s purchase price).

Once you have made the final scheduled payment, you have purchased the car, and it’s yours in full. You can then sell it on, or trade it in, and get the full proceeds of what the buyer is willing to pay for the car.

When you buy a car using an HP agreement, the vehicle itself acts as the security against the loan. So if you miss a payment, the finance company could repossess the vehicle. So it’s important that you feel confident of being able to make the payments throughout the loan period.

 

2. Personal Contract Purchase

In the case of a personal contract purchase, you still have to make monthly payments towards the cost of the car - but these are calculated to merely cover the depreciation in the car’s value over the term of the contract agreement.

You then have to make a final payment, often referred to as a balloon payment, or in the finance agreement as a guaranteed future value, or GFV, if you then want to own the vehicle outright at the end of the agreement term.

When your agreement ends, you will have paid off roughly one-third of the amount outstanding, and you’ll have three options: you can make the balloon payment - funding it however you wish - to allow you to take ownership of the vehicle outright; you can hand the car back and walk away; or you can trade in the car, and start a new PCP plan.

 

Interest-Free Deals Are Preferential Terms

Both of these methods of funding your purchase might be offered with interest-free car finance, so that you only have to pay the outstanding capital, or a proportion of it.

Your chances of being accepted for a 0% car finance deal will depend on the result of a check of your credit history which will be carried out by the finance company offering the deal.

And because an interest-free finance agreement is considered to be preferential terms, that check of your credit record is likely to be quite detailed, as the finance company will want to be sure that you are worthy of being offered their ‘best’ deal.

So if you have little or no record of having been accepted for and taken out other credit - e.g. other loans, credit cards or even a mobile phone contract - you might not be thought of as having sufficient experience of conducting such agreements, and could therefore be refused 0% terms.

 

The Higher The Deposit, The Lower The Interest

Lots of interest-free car finance packages are dependent on the customer being able to put down a substantial proportion of the full cost of the car being financed as a deposit.

This could be either an older vehicle being taken in part exchange, a cash sum, or a combination of the two.

Car dealers and finance companies look more favourably on you if you can lay down a higher deposit, as it means they are minimising the proportion of the car’s total value which they are allowing you to pay on interest-free terms.

So if you have some savings, in addition to a trade-in, to offer to help reduce the amount you borrow, this will count heavily in your favour, and could put a 0% used car finance deal within your reach.

 

Used Car Buyer? There’s Good News

While in their early days, interest-free loan deals were most commonly offered to buyers of new cars, over a few years, these terms have become more widely available to used car purchasers too.

There are a number of sound reasons why it took a little time for these deals to spread into the market more generally, including:

 

Uncertainty over the level of interest rates in general:

While banks and other lenders had the spectre of a potential increase in rates looming over them, they would have been reluctant to offer large numbers of 0% finance deals.

The cut in Bank of England base rate from 0.5% to 0.25% in summer 2016 immediately following the ‘Brexit’ vote may be seen as a sign that the Bank wants people to continue to borrow - and companies to continue to lend.

As interest rates go closer to zero, this also means that a lender will lose less potential income through offering interest-free terms than if rates had stayed the same, or even risen, and;

 

The need for new and used car dealers to maintain their profit margins:

With interest rates at record lows, it is more difficult for many dealers to make substantial profits on their finance products.

Traditionally, commission from car finance has been one of their prime sources of income, but as rates stay depressed, this has squeezed those levels, meaning that sellers have had to switch to other sources of income - for example, selling breakdown and GAP insurance products to buyers at the time of their purchase - to keep their profits up.

So if a dealer can sell more cars by offering them in conjunction with a no-interest deal, yet can persuade enough of those customers to buy extra products, such as a warranty, then that might mean that, although they are, in effect, subsidising that finance deal, they can maintain their margins by means of these add-ons.

But equally, car buyers are in a stronger position than for some time, because of the simple fact that, with more cars on the UK’s roads, which are being swapped more regularly, dealers have a bigger choice of vehicles to offer - which ultimately also means more choice for you.

And of course, used car specialists such as us at Philip Paul like to give our customers as wide a choice of quality vehicles as we can - which is also why we never stop searching for the kind of cars which we know our customers like.

 

Preparation Is Key

If you’re set on bagging yourself a 0% used car finance deal, here are 10 things you can do to boost your odds before you head down to your preferred dealer:

  • Check your credit history: There as sites such as Experian, from where you can get an indication of your current credit score, which will be calculated using information about all your current financial commitments, such as mortgage, other loans, credit cards, and even how long you’ve lived at your present address. The basic version of this service is free.
  • Ensure you’ve met all regular payments on credit or store cards for the past six months: A recent missed payment could be flagged up as a potential problem - even if you missed it by just a couple of days. So if you know you’re going to be applying for used car finance, make a special effort to keep up your payments for a few months before you apply.
  • Keep hold of recent household/utility bills and payslips: Being able to easily access your recent gas, electricity, water and council tax bills can be a help, as it will help persuade finance companies that you have accounts with these providers, which are again a big indicator of your ability to meet regular financial commitments. Also, finance companies know that people’s work patterns vary widely, but if you can prove to them that your income is regular and reasonably stable - and your payslips are a good way of proving this - that will help you overcome one of the biggest potential hurdles.
  • Make sure you pay your mobile phone bill on time: As a type of credit agreement which is held by most people these days, these have become an important way for car finance providers to check whether someone is credit-worthy. So if you pay your bill promptly every month, and ideally have a direct debit set up for the purpose, this will boost your chances of getting a better used car deal.
  • Try to avoid having multiple bank accounts: While you might want to have one separate account from any joint account you have with your partner, having money scattered around in myriad different accounts rings definite alarm bells. So the neater your financial arrangements, the better.
  • Get yourself registered to vote: Being on the electoral roll - the list of people in an area who are entitled to vote at all UK elections - is another big pointer to indicate whether your circumstances are stable, and so you’re a worthwhile credit risk. If you think not being on the register will help you stay ‘invisible’ to the authorities, this is likely to backfire on you when you come to start shopping around for car finance - or any other loans for that matter.
  • Have a stable work record with as few unexplained gaps as possible: Credit checks will quickly reveal whether you’ve been employed for a reasonable length of time, or whether you’ve regularly changed your jobs. A consistent work record - and therefore a regular income - can be another factor in your favour.
  • Have a good long-term relationship with your bank: As with your employment, stability in your financial affairs counts for a lot, so if you can prove that you’ve been with the same bank for a few years, this is another big plus.
  • If you’re self-employed, keep your accounts for at least six years: You’re legally obliged to do this by law anyway, but if you can get access to your financial records if asked to do so by a finance company, this is likely to greatly help your case. You might even be able to convince it that you’re a safe bet even if you haven’t worked freelance for this long - especially if you were previously employed full-time.
  • Take out a mortgage: This might seem like a ‘sledgehammer to crack a nut’ tactic, but it’s an inescapable fact that someone who is a homeowner is almost always looked on more favourably than someone living in rented accommodation - simply because this brings with it a host of commitments. It also demonstrates that your circumstances are stable, and you aren’t likely to do a disappearing act.

 

They Aren’t The 10 Commandments, But…

When it comes to being able to rely on getting credit when you need it, the rules outlined above come pretty close.

You shouldn’t be put off applying if you can’t meet all of them, because it might be possible for you to use a parent or other relative as a guarantor. This means they have been willing to vouch for you, and endorse that you are worthy of being extended a no-interest loan deal.

Finance companies’ criteria for judging applications do vary in any case, and you should always enquire if you’re thinking of taking up a 0% car finance offer.

The most important thing is to be open in your answers to all their questions, and even though it might not be asked for, be ready to volunteer any extra information which you think might help your case.

When it comes to applications for 0% car finance, the old maxim of ‘honesty is the best policy’ really does ring true. Being evasive, stretching the truth a little, or even out-and-out lying, are likely to lead to your application being rejected and, technically, you could be seen to have broken the law.

So if you’re straight with them, it’s much easier for a car finance company to be straight with you, and consider offering you the best deal for your circumstances. And if that means you’re offered a 0% car finance plan, then you’ll have the satisfaction of knowing exactly where you stand for as long as you take out the loan - and so are likely to enjoy driving the car that much more!

 

As well as a wide and regularly-changing selection of quality used cars at our showroom in Oswestry, Philip Paul can also offer 0% finance in some instances. So you can not only get the perfect car for you, but land yourself a great car finance package.