Your first car loan, a simple guide for anyone with little credit history
Gone are the days of a £200 runaround for your first car with the average first car now costing £3,000 and insurance often being equivalent again.
This means more than ever, young people are looking to finance their first car. However, since you can only take out personal finance once you turn 18, most young people don't have much of a credit file, if any at all.
Your credit file shows your financial commitments, this includes any mortgage, utilities, car finance, personal loans, credit cards, flexible payment options such as Klarna, and phone contracts. When you live at home with your parents, most of these commitments will be covered for you by them.
This means that young people often don’t have evidence of being able to maintain credit payments, so may find it more difficult to obtain a loan to purchase a car. At Borderway, we will look at a potential agreement for a young hirer and we can do this in two ways:
The first, is that we add a working parent as a ‘joint hirer’ onto the agreement alongside you. You still make the payments (so will still need a form of income) and you’re the main applicant on the agreement. The joint hirer will have to go through the application process too. This includes a credit search in their name and the finance agreement will show as a commitment on their own credit file too.
We may also ask for an idea of how much the insurance is going to be for the car as this allows us to work out the budget properly. Some cars can be surprisingly expensive for a young person to insure and we may have to factor in a larger than expected payment into the debt-to-income calculation. It’s often worth checking out the insurance costs before going to view a car to ensure that it’s affordable.
If a joint hirer is included on the agreement, then they will need to sign the agreement alongside you and we’ll talk through the paperwork with both parties, to ensure they understand the commitment they are taking on for the term of the agreement. If you fail to maintain your payments under the agreement, the joint hirer will then be responsible for making them.
Miss Woodburn recently left us a five-star review about how she found setting up her new finance agreement along with her joint hirer: “The people on the phone were lovely and so helpful when filling out forms etc. Rang at reasonable times which fit in with mine and my guarantors work schedule.”
You can read what our other customers have said here.
The second option is if you’re working and have a steady income to support the payments, then we can look at 2 months recent bank statements and see how you manage your money. We look at debt commitments (i.e. rent, bills etc) to income and ensure that an applicant can afford their car payment alongside their other commitments such as car insurance, tax and fuel etc whilst still leaving a bit of wiggle room for emergencies or savings each month. The Cumberland Building Society have a range of savings accounts for those savings, take a look here.
Buying a first car is a big decision and can be a bit daunting. As part of the application process we assess the dealer to ensure they are registered with the Financial Conduct Authority (FCA), so they are responsible for acting within the rules of the regulator. We’ll also read reviews to see what other people’s experience of them has been.
Some other things to consider are the running costs and maintenance for your new car. It’s worth factoring in the cost of tax, fuel, annual MOTs and servicing plus potential repairs on top of your monthly car finance payments, to make sure this fits in with your budget.
It’s important to note that if you only have a provisional licence, we can still look at a car finance application for you, but you would always need a joint hirer with a full licence.
Once you have your car finance in place and are paying it monthly on time, then it’s a great way to build your credit file and prove that you can maintain larger credit commitments. This will help with getting future car finance without a joint hirer and will also be taken into account when looking at other forms of credit such as a mortgage application. Other things you can do to help build a positive credit file include registering on the electoral roll at your current address and making direct debit payments on a mobile phone contract in your name.
If you have any questions about taking out car finance as a young person, then don’t hesitate to give us a ring on 01228 595939 and we will be happy to guide you through the process.
Alternatively, have a look at some figures to see what works with your budget here.