Purchasing a car is the biggest financial decision. There are three ways to finance your car: personal loans from a lender, and dealership financing, which includes hire purchase and personal contract purchase.
Many car buyers wonder if it is possible to use an auto loan to cover repair expenses along with the purchase cost. Yes, it is possible, but dealership financing (hire purchase and personal contract purchase) covers only the sticker price of a car, so you cannot utilise the money to pay for repair expenses.
What are vehicle loans, and how do they work?
Vehicle loans, also called auto loans, have been designed to help people meet the purchase cost of a car. Auto loans typically require a deposit, which is usually at least 10% of the market price of a car. Your credit score plays a paramount role.
- Subprime borrowers are required to put down a larger size of down payment, which is at least 20%.
- Some lenders may not be able to finance more than 70% of the total value of the car. Therefore, it is enjoined that your credit score should be up to scratch.
- Your car serves as collateral, and hence, auto loans are considered secured loans. If you fail to pay down the debt on time, your lender has the right to repossess and liquidate it to get their money back.
- Auto loans come with a fixed repayment term. Every month, you will have to pay down a fixed sum of money that goes towards both principal and interest.
- You can use the car the way you want. There will be no restrictions related to mileage and upkeep.
Dealership financing is quite different from personal loans from direct lenders. Hire purchase works the same way as personal loans, but the down payment can be slightly higher, up to 15% of the value of your car, even if your credit score is stellar. You get the title at the end of the term of a hire purchase contract.
Personal contract purchase is different from personal loans and hire purchase. You do not pay towards the purchase price of a car, but rather pay towards the depreciating cost. You will be restricted to using a car your way. Additional mileage will attract penalties. At the end of the contract, you will have to make a balloon payment to buy it, or you can return it to the dealer. Defaulting on payments results in the repossession of your car.
Do vehicle loans cover repair expenses?
It is worth noting that auto loans do not include repair costs. They cover only the purchase price of a car, but there are certain cases when it is possible.
- Rolling repairs into a loan
Some lenders might allow you to add repair costs if it is part of a purchase transaction. For instance, if you are buying a secondhand car, it may need to be repaired. The money you borrow can be used to pay for its market value as well as repair expenses.
- Top-up loans
Another scenario is that you need money to purchase a new car and to pay for the repair expenses of an existing car. No lender will include the repair costs in your auto loan. This is not possible with dealership financing, either. In this case, you will have to take out a top-up loan.
It is a small loan that your lender may combine with your auto loan. Top-up loans charge very high interest rates, even if your credit score is impressive. You should be very careful about these loans. Remember that top-up loans can be taken out from an existing lender.
Dealership financing will not let you borrow money for repair costs, as hire purchase and personal contract purchase strictly focus on the purchase price. If you have got your car financed from a car dealer, you will need to apply for a personal loan separately from a lender.
- Refinancing
Refinancing is another option that includes repair expenses in a car loan. If you have paid down some amount of debt on time, this will have a significant improvement in your credit score. In order to avail yourself of lower interest rates, you should refinance your car loan.
- You can refinance your auto loan either from the same lender or a new lender.
- Refinancing allows you to borrow additional money, which could be employed to pay for repair costs.
- Your lender will run your hard credit check. Refinancing is not feasible without a review of your credit score.
- Refinancing will allow you to borrow additional funds only if your car’s market value is greater than what you still owe.
Can I get a vehicle loan in the UK to pay for repair expenses?
You might be wondering, “Can I get vehicle loans in the UK?” to meet repair expenses along with the purchase price. Here are some situations when purchasing and combining make sense:
- You are buying a used car
It is likely that you will buy a second-hand car, but it requires some repair work, such as replacement of tyres and other cosmetic fixes. Your lender might be able to lend you money which is enough to meet the purchase cost and repair cost.
Bear in mind that your repayment capacity should be great. No lender would lend you money if you do not seem to be able to keep up with payments.
- Emergency repair on the existing vehicle
If you are looking to purchase a new car and your existing car also needs some significant repair, you might try to borrow money for a new car as well as for the repair of your existing car.
Advantages and drawbacks of combining purchase and repair
Here are the upsides and downsides of combining purchase and repair:
| Pros | Cons |
| They provide convenience with one loan and one monthly payment. | Not all lenders will allow you to combine repair costs. There are very limited alternatives. |
| Potentially lower interest rates | If repairs do not increase the resale value, you will be owing more than it is worth. |
The bottom line
Auto loans generally cover the market value of your car. Repair expenses can be combined only when you are buying a second-hand car, and it depends on the policy of the lender. Most of the time, you will have to take out a separate loan to meet repair expenses.
At the time of using these loans, you make sure that you will not struggle to repay your debt. Defaults and late payments can wreak havoc on your finances.
