A Guide To Car Loans And Finance Deals

Cars are expensive purchases for almost all of us. Anything that has three or more zeroes tends to make you think before you dive in. However, when you’re looking at a gleaming new set of wheels, you can quite easily get emotionally involved in the purchase. This is why it’s so important to know what type of finance or loan will best suit your needs prior to visiting the forecourts.

Personal Loans

Perhaps the simplest option is to go for a personal loan from a bank. APR (Annual Percentage Rate) can vary, but essentially the way this works is the interest you pay on the amount you borrow. These are normally to a maximum value of £25,000 and over a ten year repayment period. One thing to note is that your credit status can dictate the maximum value you can borrow along with the APR itself. A better credit rating means you’re more likely to have to pay less in the long run as there is less risk for the loan provider. This type of loan doesn’t have to be used to purchase a motor vehicle, but it can be used to do so.

Let’s take a quick look at a very simple personal loan. If you wish to buy a car that has a value of £6,000 and put in your old car in part exchange for £1,000 then this leaves you with the balance of £5,000. If you choose to repay over 3 years (36 months) and the APR is 8%, your total repayable will be £5,617.39.

Secured Loan

This type of loan is secured against a property – so you’d need property to secure it against. A longer repayment period and a higher maximum value can be borrowed with this type of loan, but obviously comes with the risk that you property could be repossessed by the bank should you default on the loan!

Car Finance

Generally speaking, when you go to buy a new or used car, the dealer will either have their own credit provider or be linked with an established company (such as Black Horse finance). When a dealer offers you credit, look over all of the paperwork very carefully. You may find it a good deal, or alternatively choose to arrange a loan through your own bank, depending on what sort of APR is being offered.

PCP

PCP (or Personal Contract Purchase) is an alternative way to buy a car. It’s actually a good way to get a higher priced vehicle on your driveway, but at a cost. Simply put, PCP can be better for some people as it includes road tax, sometimes maintenance too and comes with fixed monthly payments that are quite often lower than other forms of finance.

The drawback comes from the fact that once you paid off the initial period, there’s a balloon payment at the end, called an ‘optional final payment’. It’s at this point that you can hand the car back, pay off the money and keep the car, or use it as a deposit on a new vehicle. The choice is entirely yours. Overall, PCP tends to come with lower monthly costs associated but a higher total payable when the optional final payment is taken into consideration.

Fees To Consider

When organising a loan, sometimes you’ll find there are ‘hidden’ costs. A good provider – or car dealer if being arranged on the day of purchase – should discuss with you all of the options and where additional costs are accrued on the loan. Here’s a breakdown of some of those additional costs that you may see when arranging finance:

• Application fee: A fee that is charged when applying for the loan
• Arrangement fee: Normally added to the cost of the loan when your credit has been checked and agreed
• Courier fee: Depending on what is required, some companies will charge a courier fee – this can range from £25-100
• CHAPS fee: Clearing House Automated Payment Service – a way to transfer money from one bank to another, quite often in a single day. This is normally £25
• Early settlement fee: Some companies charge if you settle the loan early, as it means they won’t be getting the full interest. This tends to be based around the amount of interest remaining so depends on the value of the loan
• Optional final payment: Should you choose the option of PCP, the optional final payment is the lump sum you pay at the end in order to keep the car

Other things to consider

When purchasing a car, unless it is brand new, I’d certainly recommend running a vehicle data check. It’s fairly cheap to do so these days and could well help you spot a lemon. We’ve written before with advice on buying a used car. On a finance note, consider if you can putting down a larger deposit. This will reduce your monthly repayments when it comes to your loan, which can be very useful.

Perhaps most importantly when considering finance, choose the right car for you. Remember that you are getting into debt (for what could be a significant amount of money) so it is important that you’re happy for the wheels that you buy for as long as possible!

Lastly, should the worst happen and you fall behind on your payments, do not panic. Talk to the loan provider, they may be able to arrange something to help you. Alternatively, seek financial advice from a specialist, your bank and the Citizens Advice Bureau.