Assuming your credit profile is
|Car finance rate||XX% APR|
|Cost of credit||£ XXX|
|Total repayment||£ XX,XX.XX|
|48 monthly payments of||
£ 245 /mo
Representative example - Borrowing £5,500 over 4 years with a representative APR of 19.8%, and a deposit of £0, the amount payable would be £162 per month, with a total cost of credit of £2,282 and a total amount payable of £7,782.
We understand the excitement. You reach 17 years old, race through your driving test, and can’t wait to get a car of your own. The feeling of independence and that comes with buying your first car, especially in your late teens/early twenties is unlike anything else. However, there’s just one problem: most people in their late teens or early twenties don’t have an abundance of cash on hand that they can use to buy a car. Unless you have a fairy godmother or wealthy and willing parents, car finance is your best option for affording a car. Securing car finance as a person under 21 years old comes with its own difficulties, but there are ways to improve your chances of being accepted. Here’s our guide to car finance for young people.
Before we dive into our guide, it’s important to understand why young adults face difficulties when applying for car finance. One is perhaps a stereotype, but it’s a factor nonetheless. A person between the ages of 17 and 21 years old will tend to be considered as inexperienced and irresponsible, both in terms of driving and money management.
When a lender accepts an application for car finance, in most cases, they own the car until the loan is fully repaid by the borrower. During this time, if the borrower defaults on their payments, the lender can seize the car to account for their financial losses. A young person who has only recently passed their test is likely to be more reckless on the roads. This isn’t just an assumption based on prejudice against young people a study found that drivers under the age of 25 cause 85% of all serious road accidents. What this means is that the lender’s insurance (i.e. the car) is at more risk than if the driver was in their 30s, for example.
The average young person’s financial inexperience is also not an assumption. Most people who are in their late teens will not have taken out a loan or any form of credit in the past which means that they won’t have a credit profile. Therefore, it’s not even possible for a lender to check most young people’s history of money management.
In addition to the above, young people tend to have less disposable income than older people. This is especially true for students who will be unable to work full time due to their studies, but also for those who don’t study. People in their late teens tend to earn half the amount of people in their twenties, and this is simply due to their lack of job experience and the type of jobs available for young people. This casts a large shadow of doubt over your ability to make your car loan repayments on time. It’s a difficult situation to be in, but frankly, it’s understandable from the lender’s perspective.
It may seem like an uphill struggle, but it is certainly possible for someone under 21 years old to secure car finance.
Your best chance of securing car finance as a young person is to find a guarantor. A guarantor is someone who is liable to repay your loan for you if you begin to struggle and miss payments. It’s a form of security for the lender – they will always receive their payments, even if it doesn’t come directly from you. For this reason, if you apply for a car loan having already found a willing guarantor, you’re far more likely to be accepted. Lenders can overlook some of the factors we’ve mentioned above if you have a guarantor who is responsible, has a good credit score, and ideally in full-time employment with a satisfactory monthly net income. In many cases, a young person’s parent or guardian acts as their guarantor.
As well as taking the guarantor route, there are a number of other things you can do to improve your standing in the eyes of lenders.
One is to build up your credit profile. If you’re 18 or 19 years old, the chances are you don’t even have a credit profile since you’ve probably never needed to take out any form of credit. In order to prove yourself a reliable borrower, apply for some kind of credit, such as a credit card, and use it responsibly. Many people think that using credit cards is bad for your credit score, but this is only true if you miss your payments and overspend. If you are sensible and repay credit on time each month, you’ll develop a positive credit profile and a good credit score.
We’d hate to sound like your mother, but get a job! A job (especially a full-time job) will not only show that you are responsible to prospective lenders, but it will also give you a secure monthly income. The higher your monthly income, the higher your chances of being accepted for car finance. Lenders will want to be assured that they’ll receive their payment from you each month, and if you’re just scraping by to make ends meet, you’re unlikely to fill them with confidence. Having a net monthly income of £1200 or more will significantly improve your chances of securing a loan, regardless of your age.
To further increase your chances of securing finance, think carefully when choosing your car. You’ll want to avoid a car that’s overly costly, or has poor fuel efficiency, or comes with high insurance premiums. A more modest car, such as a small city car is a far more realistic choice for someone who only recently passed their driving test. If you choose a car that’s expensive to buy and run, then you’ll be reinforcing the aforementioned stereotypes against young people and harm your chances of securing a loan.
Finally, a word of warning. Some people try to get someone else to secure finance for them, or secure car finance for themselves under someone else’s name. The former is strongly ill-advised (and probably won’t get accepted) and the latter is considered fraud.
While we cannot guarantee that you will be accepted for car finance by following these steps, we can say that your chances of being accepted will be greatly increased. There are many factors that go into accepting and rejecting car finance applications, and it often depends on the particular lender. If you’d like more information on car finance for young people, then get in touch with our team today. We’re more than happy to answer any questions you may have and get you one step closer to owning a car.