How to choose the right road for great car finance
Around 400,000 car purchase transactions are likely to take place in March with UK motorists eager to be among the first to drive away a new ’07 registered car. However, care should be taken when considering how to fund such a purchase or risk paying heavily, say UK finance experts, Moneyextra.com.
After spending months deciding which is the best vehicle for their needs, many people are too quick to take up the first credit agreement that they are offered on the forecourt and don’t do their sums to find out if they could get a better deal elsewhere.
The most common form of forecourt finance is HP (hire purchase) – where the loan is secured against the car itself. As it is commonly offered by car dealerships it is an extremely convenient way to buy a car.
However, HP has distinct disadvantages in that the car is not owned until the final payment has been made which means that there could be severe implications if payments are not met. Average APRs for HP agreements are in double digits, although there are some 0% HP offers available (these tend to require a large deposit – up to 40% of the car’s value).
Another option offered by dealerships is personal contract purchase. This is where you defer a chunk of the car’s value to the end of the term (generally three years) where you then have the option to either pay this “balloon payment” (the guaranteed final value of the car based on its predicted depreciation), swap the car for another or simply give it back.
As you are essentially buying a smaller proportion of the car, PCP monthly payments are usually lower than traditional HP. However, these offers require you to be savvy about your finances in order to make that final payment.
A third option that is often overlooked by consumers is to take out a personal loan to fund a car purchase. Typical APRs among the most competitive personal loans are between 6.3% and 7.9%, so significant savings are there to be had in terms of the level of interest to be paid.
Those that choose the personal loan route may find themselves in a better position on the forecourt to strike a deal than those that do not, simply because they are classed as “cash buyers”. The additional bargaining power that comes with such a position may mean a model with more features or a significant sum of money off the price.
In addition to lower interest rates, unlike many HP agreements, personal loans do not attract any arrangement fees so you can be sure that you’re getting more car for your money.
In summary:
Personal loan v. Forecourt finance – it really is no contest. Average APRs offered on the forecourt are in double digits and attract both arrangement and purchase option fees, whilst personal loans are still available under 8% and do not incur any additional fees and therefore offer significant savings.
Get an Agreement in Principle – much like organising your mortgage before you buy a house, get a personal loan agreed before you go to the showroom. Doing so will mean that you are better-placed to make an accurate comparison with the deal being offered by the showroom. Being a cash-buyer in this manner may allow you to haggle on the price or additional freebies.
Robin Amlôt, Senior Editor at Moneyextra says, “Drivers should not let the smell of a new leather interior lure them into poor financial decisions at the last hurdle. By taking the time to arrange finance before visiting the forecourt, motorists can be sure that they will enjoy every mile in their new car and be certain that they are getting more metal for their money.”