5 things to know about financing a new car
Whether you are buying a brand new car or a second-hand one, choosing the best way to fund it could save you a fortune. Here are five things you need to know before you drive off in your new motor...
If you are paying by cash...
Paying for a vehicle with cash is likely to make it easier to negotiate a discount with the vendor. And of course, it also means avoiding paying interest on the purchase.
Consequently, if you have savings, it is sensible to use them. Savings rates are so low at the moment, that the rate on any form of credit is very likely to exceed the returns on even a market leading savings account.
However, paying with cash could leave you without any emergency cash and the purchase won’t be protected – more on this later.
If you are taking a hire purchase deal...
Hire purchase (HP) requires you to put down an upfront deposit and commit to a set amount of monthly instalments. Once all the instalments have been paid, the car – which you can drive from the start of the agreement – is yours.
In the meantime, however, the car could be repossessed at any point if you fall behind on your repayments, meaning you lose not only the car but also any cash handed over at that point.
It is also worth noting that you will not be able to sell the car until you have paid the final instalment (which may be larger than the others) and that ending the agreement early is likely to result in a penalty.
If you are looking for a loan...
Taking your own separate personal loan is another option. And, while you will still need to make the repayments, this means you are free to sell the vehicle at any time. If this is likely, a low-rate loan may therefore prove the best option.
Sainsbury’s, Clydesdale bank and Derbyshire Building Society are all joint market leaders in the personal loan stakes, offering representative APRs of just 5.1% on borrowing between £7,500 and £15,000.
MoneySupermarket figures show that borrowing £10,000 over three years would therefore cost just £787 in interest, based on monthly payments of £299.64.
If you are using a credit card...
Second-hand cars generally have much lower price tags than new ones. It may therefore prove possible to cover the cost with a credit card that offers 0% on purchases for a given timeframe.
If you have a good credit score, for example, you could apply for the Tesco Clubcard Credit Card, which offers 16 months of interest-free credit. The obvious advantage is that you will pay no interest at all if you repay the full amount within the interest-free period.
However, you will need to be disciplined. Otherwise, the interest charged after that point could end up costing you dear. The representative APR on the Tesco card, for example is a representative16.9% (variable).
Using a credit card will also mean you are protected under the Consumer Credit Act. This puts the card provider at joint liability with the vendor should the car be faulty or not as described. The protection applies to purchases of between £100 and £30,000, even if just the deposit is put on the card. The Consumer Credit Directive then boosts this same protection to £60,260.
When it comes insurance...
There is no point buying a car if you cannot afford to insure it. For many young drivers, however, a year’s insurance can prove more expensive than the car itself.
However you finance your purchase, it therefore makes sense to choose a make and model on which you can easily afford the insurance.
This means picking a car that falls into a low insurance group and then shopping around for the best possible deal.
You can find out more about this, and other ways to cut costs, on MoneySupermarket’s car insurance channel.
Every week, Clare Francis, financial journalist and editor-in-chief of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal. For more, visit Clare Francis on Google+.