Guaranteed Car Finance Explained

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November 9, 2016

Guaranteed car finance may be good for those individuals who are looking to purchase a new car through financing, but do not have the credit standing necessary to purchase a vehicle. Guaranteed car finance is a relatively new concept in auto financing. It is an innovative way for a lender or car dealer to provide a car to a new buyer, regardless of their credit history.

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What Is Guaranteed Car Finance?
It is typically a free service and is currently available primarily to borrowers with poor or bad credit. Companies offering guaranteed car finance allow buyers to request the amount of credit needed to purchase a new car. The terms of the agreement with guaranteed car finance lenders are not limited to purchasing the vehicle from the lender or dealer. A new buyer is permitted to shop elsewhere and bring in their outside loan agreement for financing.

Availability of Guaranteed Car Financing Programs
Though the program is modeled after rent-to-own businesses in the United States, guaranteed auto financing is currently only available in the United Kingdom.

The Finance Process
The borrower selects the car of their choice from the dealer of choice. When the selection process has concluded, the borrower applies with the guaranteed car finance company for the loan. A deposit of a sum that can be equal to four monthly payments or 20 percent of the car's price is required along with the following documentation at the time of application:

  • An Identification card (usually driver's license and/or passport)
  • Your full name
  • Your address
  • Employment details
  • Banking information, including bank statements
  • A current utility bill
  • Proof of current mortgage or rent payments (or process to make current)

Terms of the Program
The loan agreement is a contract for hire arrangement where the finance company takes ownership of the vehicle during the loan period. The company charges a monthly rental fee to the borrower in exchange for use of the car. The monthly rental fee is comprised of the loan amount plus an interest and financing charge.

As the loan balance is paid down, it is the responsibility of the borrower to maintain the vehicle in accordance with the terms of the contract for hire. This arrangement works for both the borrower and the lender. The finance company receives a tax deduction in consideration of the value-added tax levied on the vehicle's value, while the borrower does not increase his or her net asset value since ownership resides with the finance company.

Borrower Profile
The guaranteed car finance program is geared for individuals with bad or poor credit, default judgments, bankruptcies, credit delinquencies, no credit, a new start up business or other conditions that would deny them traditional loans.

Contract for Hire
The loan agreement from a guaranteed finance program is a contract for hire or rental agreement. The loan company becomes the owner of the vehicle and charges a fixed-rate monthly rental fee to the borrower. During the term of the loan agreement, the borrower makes monthly payments and at the end receives a free and clear title to the car.

At any time that the borrower cannot make payments, the loan company takes possession of the car and places it into their inventory. Since the guaranteed car loan program works for used and new cars, the loan company has the ability to move the car to a new borrower without much problem or loss.

The similar concept to the guaranteed loan finance program is rent-to-own. Companies like Aaron's Rentals and Rent-A-Center provide financing to people with less than perfect credit or the same credit profile as borrowers qualifying for guaranteed car loans. With rent-to-own, the purchaser pays a small or no deposit and makes regular monthly payments. Those payments include a finance charge that is disclosed in the rental agreement.

At the end of the loan period, the borrower takes possession of the property outright. They also have the ability to trade the property in for a newer model. These arrangements provide a great deal of flexibility and meet the needs of an individual who may otherwise be able to afford new items.

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