Car Finance for Young Drivers

Now that you’ve successfully passed your driving test, you’ll want a car you can call your own with the freedom that it brings. If you cannot afford a car upfront, finance could help you to rent and eventually own a car outright.

John Ellmore 12 November 2020

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Car finance is a form of loan which gives you the use of a car when you can’t pay the full cost upfront. With finance you can spread the cost of a car over a number of years.

There could be a number of different financing options available to young drivers so you can make the most of your shiny new licence, but this largely depends on your credit history. Read on to find out more about car finance for young drivers.

What are my options for buying a car as a 17 year old?

Because you can’t apply for car finance until you’re 18, before then you’ll need to concentrate on building up your savings and boosting your credit rating.

Alternatively, you could buy a car outright, without waiting to take out finance. If you have a job, whether you work full time or part time in support of your studies, or even on the evenings and weekends after school, you could save enough to purchase a modest car, perhaps with the support of your family.

If you’re lucky, you might be able to borrow enough from your family for a new car, but always be cautious when borrowing money. Before borrowing from friends or family have a repayment plan in place, because financial disagreements can put a lot of strain on personal relationships.

When you’re 17 it’s hard to build up a credit rating, but there are some steps you can take. For example, you can open a current account, deposit funds in your account regularly. Understanding your finances is key before you turn 18.

Even after you turn 18 securing car finance as a young driver is tricky. This is because, as with any loan, you’ll need to have a good credit score to be accepted.

What car finance deals are available after i’m 18?

After your eighteenth birthday, as a young driver you could be eligible to buy your first car on finance if you have a good credit rating. When exploring car deals you’ll find that manufacturers, car dealerships and online brokers offer car financing schemes, which will allow you to walk away with the use of a car upon payment of a monthly fee.

However, although it's possible to apply for credit and purchase a car on finance after you turn 18, this doesn’t necessarily mean you’ll be accepted. You will need to have built up a good credit history and prove that you will be able to afford the repayments to demonstrate to finance companies that you aren’t a high risk borrower.

Some lenders may be reluctant to lend to young drivers with a limited credit history and some may only offer finance to those aged over 21.

But, it is possible to boost your credit score by repaying forms of credit, like a credit card. If you pay on time, this could improve your credit score and so improve your chances of getting car finance, but you should only take out credit if you are confident you can manage repayments.

There are also some specialist car finance providers that may be able to offer finance to those with a poor or limited credit history, but bear in mind that these often come with higher interest rates.

What are the main types of car finance?

The main types of car finance are:

Hire purchase

A hire purchase car through a credit agreement is purchased by a credit company and then leased to you, after the payment of a deposit- usually 10% of the total price of the car. With a hire purchase agreement you can spread the cost of repayment over a number of years.

At the end of the contract, if you have kept up with monthly repayments to repay the total amount of the loan, you can choose to return the vehicle or own the car by paying an “option-to-purchase” fee.

Conditional sale

A conditional sale is very similar to a hire purchase agreement. It’s the same in every respect except you are obliged to own the car after you have repaid the costs. The car is sold to you on the condition that you repay the lender the total amount lent to you, and after the last payment you will automatically become the owner.

Personal contract purchase

Like a hire purchase, with a personal contract plan (PCP) you make monthly repayments over the contract term; however you only pay part of the total cost of the vehicle. At the end of the contract term you have the option to pay off the full amount in what’s known as a balloon payment, after which you will own the car. Alternatively, you can return the car at the end of the period without making this payment.

Personal leasing

These car rental schemes are typically available on brand new cars and run for 2-4 years. You’ll return the car to the leasing company when the lease ends. If you only need to drive for a set number of years, or want to have the flexibility to regularly change cars this might be a good option for you.

Other finance options

If you find you have been declined car finance, don’t give up as there are a range of other options.

Build up your credit history

It’s important to note that when you apply for car finance, the leasing company will make a hard credit check on your credit report to assess your affordability, and determine the level of risk you present.

A hard credit check leaves a permanent mark on your credit file outlining whether your application for finance was successful, or if it was turned down.

Making a number of failed credit applications in a short period of time is damaging to your credit score, so you should only apply for finance if you are confident you will be accepted.

Loans

Loans for young people are available, so you could apply for a loan if your credit rating is high enough. The problem with loans as a young person is you may only be offered a small amount, potentially with quite high interest rates too.

If you do have a good credit rating, a loan could be a cheaper option in the long term than hire purchase or personal contract purchase.

Guarantor car finance

A guarantor is someone with a good credit rating who is added to your application, with the responsibility of repaying your loan if you are unable to.

This could be a possible option for young people with limited credit histories who may otherwise have struggled to get car finance, as the guarantor minimises the risk to the lender.

If you are a parent, friend or relative considering becoming a guarantor, remember that if you cannot make repayment, both you and the applicant who took out the car finance will have their credit scores adversely affected.

Shop around

Car dealerships and manufacturers won’t necessarily offer you the best terms for car finance, so don’t go for the first option offered to you, or go into an agreement unprepared. Instead take the time to build a comprehensive understanding of the different options available, to help you find the most suitable car finance for your situation.

Read our guide of 10 things to be aware of before taking out car finance for more information.

Compare car finance

To get the best deal available to you, it’s important to compare car finance deals until you find one which is suitable for your requirements and your financial circumstances.

Don’t forget to ensure you’re driving fully insured and covered by comparing our car insurance deals and breakdown cover.

Now go out and enjoy the freedom of the open road!

About the author:

John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more

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