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Car finance for young drivers

Here's how you go about financing a car when you've not long torn up your L-plates.

A group of people carpooling. Source: Blablacar

Nothing beats the excitement of passing your driving test. Having the flexibility to go anywhere, at any time – without relying on lifts – is a tremendous feeling.

However, you need a vehicle in order to enjoy such freedom and getting finance isn’t always easy for a newly-qualified young driver.

Here we take a look at the options and what you need to consider in order to slip behind the wheel of your very own car.

Looking for finance on a new car?

Car finance for 17-year-olds

If you’re under 21 years old it’ll be harder to find a suitable car finance agreement because you’ll probably have little – or no – credit history.

If you’re only 17 years old it’ll be even trickier because you’re not allowed to sign a credit agreement until you turn 18.

In that case your only option is to buy the best car you can afford through a combination of your savings and any informal loans from family or friends.

However, plenty of friendships have been destroyed and family rifts created over money, so tread carefully.

Car finance for 18-year-olds – and older

On your 18th birthday the situation improves. However, just because you are eligible to apply for car finance doesn’t automatically mean you’ll be successful.

Many lenders will be reluctant to agree finance unless you're in employment - with a regular income - and have a decent credit history. 

Both are hard to come by at this age, particularly as many such drivers will be at college or university and juggling numerous expenses. 

This can make it tough to find car finance for students. 

The good news is there are companies focusing on this group – but you need to examine the deals closely to ensure it’s cost-effective.

car keys on the table

Understand your car finance options 

You need to understand your car finance options. There are two main alternatives.

Hire purchase (HP) involves paying a deposit (usually about 10%) then repaying the balance, plus interest, over an agreed loan period. 

HP is often best for those with decent deposits that are looking to take ownership of the car at the end of the contract.

Personal Contract Purchase (PCP), meanwhile, requires you to make monthly repayments, but you're only allowed to use the car until the end of the contract.

At this point you have a choice to make: return the car; pay the so-called balloon payment to take ownership; or go straight into a new PCP arrangement.

READ MORE: Car finance explained

Alternative sources of finance

Of course, there’s no guarantee that you’ll be accepted for either hire purchase or personal contract purchases. 

In this case, what are your options? Well, there’s always the aforementioned borrowing from family and friends.

Build a credit history

Regardless of whether someone will lend you some money, there are things you can do in the meantime that will help you over the long-term.

For example, it’s a good idea to start building a credit history as this will dictate how successful you'll be in applying for finance in the years to come.

Setting up and using a UK current account will help, as will paying regular direct debit bills for items such as your mobile phone.

Using a credit card – ensuring you make all your scheduled repayments – will also help prove you are a good risk for finance.

Just ensure you don’t forget to pay any bills as a missed or late payment will count against you. If you end up being taken to court for the money this can be damaging.

Also – it’s worth remembering that too many hard credit checks – which happens when you make an actual application for credit – can adversely affect your credit score.

READ MORE: Credit scores and checks explained

Car on calculator, working out APR

Put it on the credit card

Then there are credit cards. 

If you can get a card with a decent interest-free period on new purchases – and clear the debt at the end of the term - this might be worth considering if the credit limit is enough.

A word of warning, however. Once the interest-free period is over you'll find the interest rate is likely to be well into double figures, making your car a lot more expensive.

Loans for young people

There is the possibility of applying for a loan. However, the chances are that you’ll be offered a small amount – or a rate higher than advertised – as you’re a risky proposition.

There are firms that offer loans to people with bad credit histories. The downside, once again, is that their interest rates can be substantially higher.

Guarantor car finance

This sees a family member or friend with a decent credit score being added to your application. This person will be responsible for repaying the loan if the borrower is unable.

t’s designed for people with very little credit history – rather than those finding themselves strapped for cash – as regular repayments have to be made.

Remember, if the borrower and their guarantor fail to make these repayments then both of their credit scores will be adversely affected.

READ MORE: Guarantor loans explained

Paying with cash

Of course, it’s usually preferable to buy with cash because you avoid having to pay interest on any loan or finance agreement.

Do you have a wealthy friend or family member? If so, maybe they’ll informally lend you the cash required at zero – or very low – rate of interest.

You might also be able to use it to your advantage when buying the car.

Let the dealer think you’re considering finance until you’ve agreed the bottom-line price for the car – and then push for a cash discount.

Hands surrounding a toy car to protect it

Insurance costs

There’s no getting away from the fact that young, inexperienced drivers can expect to pay hefty premiums – considerably more than £1,000 - for even relatively modest cars.

However, there are some tricks of the trade that might soften the blow. The first is opting for a policy that comes with a black box.

These telematics devices monitor how the car is being driven and reports back to the insurance company. Premiums on such policies can be lower.

You can also add a more experienced driver to the policy. However, never put them as the main driver when that’s not the case as that’s fraudulent.

If you have purchased a new car either in cash or through car finance, then you might want to think about taking out gap insurance. Gap insurance will protect you from depreciation in the event your car is written off through damage or theft. This is of course an additional cost, so make sure you really think about the type of car you are buying.

READ MORE: Top tips for cheaper car insurance

Choose the right car – and remember to haggle

A lot will depend on your choice of car. Avoid hot, sporty little numbers with huge engines as these will be extremely expensive – if not virtually impossible – to insure.

Garages – both dealerships and second-hand lots - may not like the idea of having their margins squeezed, but it’s always worth seeing if you can get something off the price.

The top tip is to do your homework. Have print-outs showing how much similar vehicles are being sold elsewhere and be clear on the specification you require.

READ MORE: how-to-negotiate-the-best-car-deal