It may be that you are a City whizz-kid with a nice fat annual bonus with which to buy a car. You may be of sufficient means to dip into your bank account, or you may have had the foresight to save up the many thousands needed. But for most of us, car buying means borrowing at least some of the sticker price from somewhere.
Traditionally buyers looked for a hire purchase deal from a specialist lender or from the dealer. Typically, after paying an initial deposit, the balance is repaid over 24-60 months.
Until you’ve paid off all you owe, you don’t own the car and cannot sell it without the agreement of the lender. And if you default on the payments, the lender can repossess the vehicle.
The interest on a hire purchase agreement tends to be fairly low and the deposit is often quite low too, or is covered by the trade-in value of your existing car. But as with any loan you must shop around and find the best deals and avoid excessive interest rates. For this reason it’s important to have your finance sorted out well in advance of actually paying for the car. It’s too easy to be left at the mercy of a dealer’s finance scheme, which is unlikely to be the best around.
Having said that, there are great deals to be had from dealers sometimes, if these suit you. It’s not unusual to find 0 per cent finance on some models and this can be a great option, as long as you know exactly what you’re getting. There’s no point jumping at a 0 per cent finance deal for 24 months, after which you pay well over the odds in interest, if you can’t actually pay it all off in those 24 months.
If you are going with dealer finance, always sort out your haggling over the car’s price first. If it’s all part of the package, you could find that the canny salesman is recouping some of the cheapness of the finance against the trade-in figure or the discount on the new car.
The small print is important in any HP deal. Always check for extra payments for setting up, paying off, paying off early and so on. Ensure you have a figure for what you actually pay in total and get all the details in writing to consider before you sign up.
An advantage of a hire-purchase agreement is that if you do have a defective car, the seller and the HP company are jointly liable under the Sale and Supply of Goods Act. But remember, if you do find yourself rejecting a car as unfit, you must keep up the payments until all parties agree to accept liability, otherwise you could find yourself being treated as defaulting on the loan.
There are lots of businesses out there that advertise car finance, particularly for those with a poor credit. Take very great care with these. It is vitally important to read the small print and not become tied into ludicrously high rates of interest, especially for a car that may be second-rate. Better to shop around the established finance houses to see if you can get a realistically priced loan for a car that’s really worth the cash: that way if push comes to shove, you’ll probably be able to work with the lender to sell the car at a realistic cost to recover a reasonable amount of money to repay the debt.
Personal loans are another simple way of buying a car on cheap finance. Unsecured loans for a variety of purposes are widely available, assuming your credit rating is OK. It is imperative, though, to check a range of lenders to ensure you’re getting a good deal. The internet has made this much easier, with sites such as www.moneysupermarket.com
and www.quickcompare.co.uk doing the work for you, scanning the rates on offer from a range of lenders.
Don’t assume any one of these sites automatically check everything available though. Some sites may have a comparatively small panel of lenders from which to quote; others may scan hundreds. Check a number of comparison sites and you’ll almost certainly end up beating even the pretty good price given on the “cheap loan” junk mail from your bank or insurance provider.
The APRs quoted in relation to any finance deal are a good basis for comparison, but aren’t absolute. Many people don’t realise that the calculation of an APR is a complicated formula that doesn’t necessarily truly reflect the absolute cost of a loan. So a 5.4 per cent APR on one loan could mean you pay pretty much the same as on a 6.2 per cent APR loan from another company. Always look at the total figures you’ll pay back.
One other thing to look out for is debt insurance. It may sound attractive to pay an insurance premium so your debt is covered in the event that you can’t maintain payments. But beware large start-up fees, high charges and small print that will leave you stranded outside narrow criteria for paying up.
There are other ways of financing a car that have become popular in recent years. One such is personal contract finance. This is a variant of the traditional business lease, under which you hire the vehicle for anything between two and three years for a low deposit – or trade in – plus a fixed monthly repayment that covers about half the car’s value. Maintenance costs can be incorporated for an extra monthly premium. At the end of the term you can pay a lump sum to cover the outstanding cost of the car and keep it, or use any equity you have in the car – the difference between the lump sum to clear the debt and the trade value of the car – as the deposit on another car; or simply walk away with no debts but no car.
This form of finance may well suit people who like to change their cars often and who like to know they’re paying a fixed sum every month – but who don’t mind paying extra for that security.
There can be conditions attached, such as mileage limits, and any damage to the car will hit its value when assessed at the end of the contract term. Also, if the market slumps, as has happened recently, you may find the value of a car after three years isn’t enough to give you any equity, hence you don’t have a deposit for another car.
But the upside is that actual monthly payments are usually quite low, the deal is easy to set up with the dealer at the time of buying your car and there’s usually flexibility to accommodate your personal financial circumstances.
Some people prefer to raise their car finance by borrowing on their mortgage. This has probably the lowest interest available, but don’t forget that it may well be paid off over the lifetime of a mortgage and does mean your home is being used as security against the loan.
It can be a very good option if you have the sort of mortgage that will allow you to repay the amount borrowed, without penalty, in a shorter timescale, to suit you.
Wherever you get your finance, the golden rule is that you must know exactly what your finance is going to cost you in total by the time you’ve finished. Always read the documentation carefully, and use the “cooling-off” period to say no if it’s not right. The best deals will normally be had by shopping around. It may take a little time and effort, but it will almost certainly pay off handsomely.