Is a car loan a bad idea? What to watch out for
Taking out a car loan is one way to get a vehicle if you can’t afford to buy one outright. But according to recent research from the Daily Mail, it could also land you with a high level of debt.
Some car loan providers are offering loans to people with bad credit and no deposit. This is leading to some taking out loans that they just can’t afford to pay back – meaning they face having the cars repossessed or defaulting on the loan.
Does this mean that a car loan is always a bad idea? Let’s take a look at what the research shows – and what to do if you’re struggling with a loan already.
Beware of ‘reckless’ car loan sales
The report by the Daily Mail found that 85% of car sales last year were on car finance. This was up from just 50% in 2009.
Undercover reporters also found that some car loan providers offered £0 deposit deals, even if they said they were unemployed. Some providers would accept borrowers as long as the monthly payments wouldn’t be more than a quarter of their paycheque.
Because of stories like this, the Financial Conduct Authority (FCA) is already investigating ‘irresponsible lending’ from car loan providers. This should mean that the FCA will be able to crack down on lenders who accept borrowers who can’t afford payments.
Should you consider a car loan?
So is a car loan a bad idea? Of course, it’s not as simple as a ‘yes’ or ‘no’ answer.
If you’re confident you can keep up with the payments and that they won’t stretch your finances, a car loan might not be a bad idea. It means you could get a vehicle if you don’t have enough savings. And if you need a car to get to work or to take the kids to school, it might seem like a good option.
But if you’re already struggling with a tight budget, a car loan will just put extra pressure on you. If you take one out and start to fall behind with payments, the debt could quickly spiral out of control.
And this could lead to more serious debt problems.
All lenders should test your affordability when you apply for any form of credit. This means they should check to see if you’ll be able to afford the repayments on top of your existing budget. If a car loan provider doesn’t check this, they’re probably not a responsible lender.
It’s also important that you understand what you’re actually getting with a car loan. For example, with a personal contract plan (PCP), you won’t ever own the car but you will still make monthly payments on it. And after a few years, you’ll have to give it back. If you were planning to keep the car for much longer, this might not be a good option for you.
Are you struggling with a car loan?
If you’ve already taken out a car loan you can’t afford, you might be finding it difficult to keep up with the payments. With a tight household budget to manage, it’s easy to start to fall behind with your debts.
But you don’t have to deal with unaffordable debts alone. There are options available and they could help you get back in control of your finances.
If you’re currently worried about your finances, have unsecured debts from personal borrowing and would like to speak confidentially to an advisor who can talk to you about the benefits and considerations of a range of debt solutions and personal insolvency solutions, please get in touch by calling Harrington Brooks on 0800 048 1764.
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