Car Finance For Young and New Drivers - A Guide
Several finance options exist that allow you to finance the purchase of a car.
Taken out from a bank or car dealership. Such loans are unsecured so you don't have to be a homeowner to get one. However you will need a regular income and must be 18 or over. As soon as you make the payment the car is legally yours. The lower the APR (interest paid on the loan) the less money you will eventual have to pay.
Hire Purchase (HP)
With Hire Purchase you pay off the entire price of the car through a series of monthly payments. The car only becomes your legal property at the end of the contract, when all monthly payments have been made. As a rule you will have to pay a deposit up front. The higher the deposit the less the monthly payments will be.
Hire purchase is essentially a type of secured loan, a loan secured against an asset i.e. the car. Fail to make the payments and you lose the car. As with a normal loan you should pay close attention to the APR.
Involves making monthly payments, under which you are in effect hiring the car for a fixed period. At the end of the term, you have the option:
- To return the car with no further payments,
- To enter into a new deal for a new (or second hand) car,
- Of making a final payment and buying the car for yourself.
Before Your Start Searching For A Car To Buy
- Calculate how much you can afford to pay for your car, how much deposit you can pay (the higher the better) and how much you can afford to pay monthly.
- Remember to include the running costs of your car - car insurance, road tax and fuel costs.
- Consider the entire car financing options available to you before you look for cars. Different lenders will provide different rates for financing so it pays to shop around.
- Always read the terms and conditions to make sure you understand how much your loan will cost you. Under the new FSA (Financial Services Authority) regulations these must be clearly visible and explained in plain English.
- Beware of lenders quoting you the flat rate instead of the APR, as it is lower, so sounds a better deal.
- Take your time and carefully evaluate the various options. The time spent will be rewarded in lower payments.
- Be cautious of car manufacturers offering finance deals with zero or low interest rates. You may lose out on discounts and extras that someone with another type of loan will get. Also the amount of deposit required for such deals an be high.
- When comparing loan payments between finance companies, compare similar deals. If you want to borrow £4000 over two years, make sure they all quote you for this period. Also check whether the rate is fixed or variable.
- The larger the deposit, the lower the amount you need to pay later as interest. Low or zero deposit loans can be tempting, but you end up paying a much higher rate of interest later.
- Watch out for hidden costs such as administration or early redemption fees. Some finance options have a mileage restriction that can be expensive if exceeded.
- Low monthly payments over a long period can be tempting, but you could end up paying much more for the loan than your car is actually worth. Work out how much you will end up paying overall for your car loan.
- Some lenders may ask you to take out Payment Protection Insurance, which can add a bit more to your monthly loan payments. Check if this is necessary and how much it costs. Some lenders tack this on as an afterthought, be careful you don't get stung.
When Taking Car Finance From A Car Dealer Beware
- Never accept the first finance deal offered by the dealer as this will likely be the most expensive option, the one they will get the best commission on. Always negotiate for a better deal.
- Dealers can make more money out of the finance options than they do from the sale of the car, so always be careful when asking them for finance, as they may not be giving you the best loan. If they offer you finance, check it out against other loans before you accept any finance agreement.
- Don't let the dealer rush you into a finance deal. They must, by law, give you a full written quotation, which you can take away and consider. If they offer you a 'deal for today only', don't let this fool you into signing a finance agreement.
- Don't give the dealer too much information when requesting a quotation as they can use the information to shop around lenders and get themselves a better rate of commission. You should shop around for yourself.