Car loans have traditionally been the cheapest way to finance a new motor.
A car loan is a simple, unsecured loan where you borrow up to £25,000 over a pre-determined length of up to ten years for a motor purchase.
You don’t need to get a specific car loan as a cheap personal loan would also do the trick.
Consumer lobby group Which? says unless you have the cash upfront, the cheapest financing method is usually a car loan, unless you can get an interest-free credit card with a large enough credit limit.
However, excited buyers often fall foul of salesmen who flog them a dealer-arranged finance package which can end up costing them dear. In fact, making the wrong choice could cost you hundreds of pounds.
Often, following the long struggle of comparing prices and haggling on the vehicle itself, buyers neglect doing the same research when paying for their new car, but this is a mistake. Research shows more than 80% of used vehicles are bought on hire purchase, which is a dealer-arranged finance package. This can result in paying £1,000 or more than the cheapest alternative. With a hire purchase plan, you pay a deposit, then make monthly payments for up to five years, when you then own the car.
Other packages your dealer may offer you include a personal contract purchase (PCP), which is similar, though monthly payments are lower. However, you have to pay an expensive final lump-sum to own the car. A PCP is suited for those wanting to change motor regularly.
You can also take a personal leasing plan which means you never own the car, while you may be able to negotiate a 0% dealer loan, though this can reduce your haggling power on the car itself.
What’s key is that you haggle on the price of the car, and then focus on how you pay for it, but keep these two components separate.
You may be offered a few hundred pounds off the car price in return for taking out a hire purchase plan, as the deal is likely to get commission from selling the finance package.
But this could mean the savings made on the car itself are eaten up by the extra interest charges.
Where you may come unstuck when applying for a car loan is if you have a patchy credit history, in which case you risk being rejected or having to pay a high interest rate. Therefore, it is important to weigh up your finance options before committing to ensure you pay as little as possible.