Car Loan or Finance

Driving down the cost of Car Loans

Usually the cheapest way to finance the purchase of your car is usually

with a personal loan. But there are other methods. This article


Most car buyers spend hours researching the makes and models of car

before deciding which to buy. Then four out of ten rush out to the

showroom and sign up for the car within 30 minutes of stepping inside.

Finance package or Car Loan - Some Facts...

But will their painstaking research extend to sourcing the cheapest

finance package? Probably not. Whilst around 50% of new cars bought

privately are purchased on finance, nearly 20% sign up in the showroom

for the finance deal offered by the manufacturer. Unfortunately that

could turn out to be a costly decision. With typical manufacturers

finance costing 13.7% per year over a 3 year and including a 10%

deposit, they could be throwing some £1,800 down the drain.

Take someone buying a new Renault Megane Sport Saloon Privilege 1.6 and

let's assume that it costs £16,000 on the road. Including 3 years

interest that means the full cost will be £17,384. However, there is a

much cheaper option. With a good credit history you could get a


loan at only 5.5% and end up paying just £15,631 - that's a full saving

of £1,753. This goes to prove the old adage that it pays to shop


Rushing to accept the dealers finance package can hit your pocket hard


it's effectively giving back the discount we hope you negotiated!

OK, I can hear talking about the special finance offers that

manufacturers are forever advertising. Yes, there are some really good

deals - but always look closely. Some deals only relate to specific

models with a set specification, often the cars that the manufacturers

are having trouble shifting. A beware some deals have a sting in their

tail. Take Volkswagens' current offer on the Polo E2. Their deal is

advertised at 5.8% with a monthly repayment of £99 over 35 months -

sounds a great deal but look more closely and you'll find there's a

final balloon payment of £3,750 or alternatively you can trade in your

E2 for another Volkswagen.

The car manufacturers use these deals to promote brand loyalty and

encourage another purchase in 3 years time. They know that most cars

will be traded in after 3 years rather than pay the large balloon


Alternative Means to Finance your Car

Of course, personal loans and manufacturer's finance are not the only

way you could finance your car.

The traditional way to pay for your car is through hire purchase. With

HP you pay a deposit, usually of at least 10%, or trade in your


car for at least the same value, and then use HP for the balance of the

price. The loan is then effectively secured on your car. So in


your car still belongs to the HP company until you have made your last

monthly payment.

Then if you want to sell your car before you've completed the HP

agreement, there will almost always be an early redemption penalty -

often up to three months interest. The HP company will also register


financial interest in your car with HPI the finance tracking agency.

This effectively means that you will be unable to sell your car until

you have paid off the HP loan.

Another alternative is Personal Contract Purchase, PCP for short, and


recent years PCP has become very popular. Here you also agree the

mileage you expect your car to clock up each year. You then pay a

deposit and part of the purchase price is deferred until the end of the

agreed payback period. Your monthly repayments then repay the balance

and the interest. These schemes are highly flexible as you can select

the length of the loan and the size of the deposit but you'll find that

interest rates vary considerably between lenders. The current average


about 12.8% - still well above the 5.5% rate for a cheap personal loan.

At the end of the PCP contract you'll have three options: -

Pay off the deferred balance and keep the car

Trade in the car using the trade in value to help pay off the deferred

sum and hopefully leaving a balance towards a new car

Hand in the car and walk away with nothing more to pay.

This last option is always subject to your cars' condition reflecting

normal wear and tear and its mileage is in line with the annual mileage

you agreed when you purchased it. If the recorded mileage exceeds the

forecast mileage, then you'll have an excess mileage charge to pay. The

cost per excess mile will always be specified in the PCP agreement.

One of the big advantages of PCP is that the guaranteed buy back option

effectively protects customers against excessive depreciation of their


As you would expect, car dealers take a commission for selling PCP

contracts and to encourage you, you may find they'll agree a bigger

discount on your car if you take their PCP deal. If your lucky, they


even throw in a low cost servicing package or low cost insurance. But

take care. You'll need to do some homework to ensure that these extra

goodies are truly worth the extra interest charged on the PCP contract.

Resource Box

Brokers Online educate their clients by writing uptodate finance based

articles which cover important changes happening within the finance

markets. They also provide financial services which include Loans, Tenant

Loans and even Critical Illness Cover.

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"Yes but dont forget the car also depreciates within the 3 years that you have been paying £150, so you would have lost that money anyway just in the value of the car naturally going down, the question is if you've paid more than what the car has lost in value plus the extra interest you would have paid on other finance deals. I think its a good deal for anyone who is happy to trade in after 3 years."


"I took out a pcp on a polo 55reg thinking that £150pm is cheap. However I now have to either pay the balloon amount of £4500 to keep the car and to hand it back VW are offering me £4000, which means I have lost my deposit, I have lost all those payments and even though I have stuck to 10,000miles a year I have to pay VW £500 to TAKE my car!!! so BEWARE!"