Car finance for young drivers and students
Young drivers, including students and those who are working, may find it more difficult to get car finance because of their limited credit history. However, you can do certain things to improve your chances.
When you’re looking to buy your first car, you may not have the money available to pay for one outright. You might ask your family to help towards the cost, but you could also consider car finance.
Car finance is a type of loan which allows you to spread the cost of a car over a number of years.
While car finance can be a useful way to help you buy a car, through no fault of their own, young drivers and students may find it more difficult to get accepted. You can’t get car finance for 17 year olds because you can only apply for credit once you’re 18 but, it is possible for young drivers aged 18 and above to get car finance.
Your credit score and income are two of the most important checks lenders make when assessing car finance applications, and young people may struggle to fully satisfy the requirements of the provider.
Read on to find out more about getting car finance for young drivers and students and what you can do to improve your chances of approval.
Why do young drivers struggle to get car finance?
There are several reasons why young drivers can find it more difficult to get accepted for car finance. These include:
- Having little or no credit history. Lenders will look at your credit score when you apply for finance but, because you can only take out credit once you turn 18, young drivers may not have had the time to build up their credit score to a level that would satisfy the lender.
- Not having an income, or having a low or irregular income. Many young people may have part-time jobs or work in the gig economy, and some will be relying on their student loan as their main source of income. Car finance providers will want to lend to people with a stable income that can comfortably afford to repay the loan, so they may be more wary about lending to young people who are not in full-time employment.
- Not having a deposit. Some younger people may not have as much money saved up for a deposit, which can make it more challenging to get the best car finance deals.
Car finance for young drivers
After your eighteenth birthday, as a young driver you could be eligible to buy your first car on finance.
However, although it's technically 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.
There are a few different car finance options available including:
With a hire purchase agreement you can spread the cost of repayment over a number of years, after paying a deposit.
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.
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
With personal contract purchase (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.
Car leasing, also called personal contract hire, is typically available on brand new cars and runs for two to four 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.
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.
Other finance options
Car finance isn’t the only way to buy a car. For example, you may want to consider some alternative options like:
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 not qualify for a loan or 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 than hire purchase or personal contract purchase.
» COMPARE: Unsecured personal loans
Guarantor car finance
Guarantor car finance usually comes in the form of a personal loan, rather than a traditional hire purchase or PCP agreement, though you may find some options for these as well.
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.
Applying for car finance with a guarantor 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 the applicant cannot make a repayment, the responsibility will fall to you and if both you and the applicant cannot pay, all parties will have their credit scores adversely affected.
Some lenders will allow you to make a joint application for a car finance or loan with another person. As with guarantor finance, having someone else on the credit agreement can make lenders more prepared to offer finance to young people with limited credit histories.
Bear in mind that both parties are responsible for paying the loan, so any missed payments could affect both credit scores.
Can I get car finance with a provisional licence?
Many lenders will require you to have a full driver’s licence to get car finance, but there are some that will lend to drivers with a provisional licence. However, there may be a limit on the amount that provisional licence holders can borrow.
Because many drivers with provisional licences are young, it will also be their lack of credit history and possible low income that will make some lenders less willing to offer finance.
But, if you have a good credit score and you have a good income that means you can comfortably afford the repayments, some providers will lend to you even if you haven’t passed your test.
You may stand a better chance of getting car finance with a provisional licence if you apply with a guarantor, or you may prefer to wait until you pass your test before applying.
How can I improve my chances of approval for car finance?
There are some things that young drivers and students can do to boost their car finance application, including:
Building up your credit history
When you’re young it can be hard to build up a credit history, but there are some things you can do to help your score. For example, you can register to vote, open and use a current account without going into your overdraft, pay bills on time (including your mobile phone), and repay other forms of debt like your credit card.
However, because lenders will make a hard credit check when you apply for credit, to assess your affordability and determine the level of risk you present, you should limit the number of applications you make. A hard credit check leaves a permanent mark on your credit file, and too many applications can damage your score.
Only apply for credit if you are confident you can manage repayments.
Increasing your income
This won’t be easy or possible for everyone to do, but you will improve your chances of getting car finance if you have a good income. For example, you could get a part-time job to supplement your student loan to make the lender more confident that you will have sufficient cash coming in to make your repayments.
Putting down a bigger deposit
If you manage to save up a bigger deposit, you won’t need to borrow as much through car finance. Because you would borrow a smaller sum, the lender may be more willing to approve your application.
Buy a cheaper used car
As with the above point, you won’t need to borrow as much if you choose a cheaper car. If you want to finance an expensive, brand-new car, the lender may be less likely to offer you a loan because the payments are likely to be more expensive and therefore could be unaffordable.
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.
Car dealerships and manufacturers won’t necessarily offer you the best terms for car finance, so you shouldn’t necessarily go for the first option offered to you, or go into an agreement unprepared. Instead, take the time to understand your options and only apply for finance if you are confident you will be successful and will be able to make the repayments, alongside the other costs of running a car.
» COMPARE: Find car finance deals
Image source: Getty Images
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more