Easy steps to getting the right loan deal

19/08/09

Use this motors.co.uk guide to find the right sort of borrowing, and keep the cost ultra-low

It’s a fact. Very few of us are rich enough to afford a decent car without a lender’s help. And, writes Ray Castle of motors.co.uk, in the excitement of getting a shiny new motor, it’s too easy to think little about where the money’s coming from. So long as it’s there, it’s tempting to take the first loan you’re offered.

Stop. Not only will a cool head and a little research save you, potentially, hundreds of pounds: it could also mean that you can afford a far better car than you’d imagined.

If you’re buying for yourself, there are three main types of loan to consider:

Hire purchase
You pay a deposit, followed by regular and equal monthly payments over an agreed span of time until the debt is repaid. Hire purchase is simple and is often the cheapest of loans, particularly if you plan to keep the car for some years. The main thing to remember is that the car belongs to the finance company until you’ve paid for it in full. They can and will snatch it back if you stop paying.

Personal Contract Plan, or PCP
Usually offers the cheapest monthly payments. You pay a deposit, followed by equal monthly payments over two to three years. After that, you have three choices. You can hand the car back. You can make a final payment, usually a quarter to a third of the car’s original value, and then you’ll own it outright. Or you can buy another car. Here it gets a little complicated. If you do that, and your car is worth more than the final payment, you’ll see the difference put towards the deposit you’ll need. But if it isn’t, you still won’t have to pay anything on your old car. As with hire-purchase, the loan company owns the car until you've completed the loan.

Personal loan
Simple and effective. You borrow in advance and pay ‘cash’, so you own the car outright. There’s no deposit needed: you repay the loan in equal monthly amounts over a set period. This type of borrowing is usually (but not always) a little more expensive overall than hire purchase and is also harder to obtain. To borrow, you’ll need a steady job, a good credit record and will also need to be a homeowner or mortgage payer.

You’ll apply for one of these direct from the lender: a bank, building society or a finance company. One of the main benefits is that you can buy any type of car, from anywhere: private seller, used-car trader, big garage or car supermarket.

What it will cost you?
Once you have decided why type of borrowing will be best, you need to look at the cost of the loan. Reputable lenders will supply a written quote, which will detail all this. Rather than rushing to sign up for a loan, take time to read the agreement. If there’s anything in it that puzzles you, ask the lender to spell it out. If you are still not clear, take the paperwork to your local Citizen’s Advice Bureau. Click on to www.citizensadvice.org.uk to find your nearest branch.

Any loan costs the lender roughly the same amount to set up and process, whether it’s for a few thousand pounds or more than £10,000. That’s why small loans usually attract a higher rate of interest than bigger ones.

How to you check quickly how expensive or otherwise the loan will be? Easy. Check the APR, or Annual Percentage Rate. This figure reflects how much interest you’ll pay in all each year.

Be aware that car sales people like to quote the yearly interest, or ‘flat’ rate. It’s usually just less than half the APR, and so sounds a lot cheaper. Our advice would be to ignore such figures and stick always with the APR, simply because it is the only number that you can use to compare the cost of different loans. To calculate the APR, double the ‘flat’ rate and then add a little bit.

All loan agreement paperwork should by law, display the APR figure prominently. The forms most lenders use show it in a box, right in the centre of the first page.

Which is best?
Looking at the loan types we’ve outlined above, hire purchase is often (but not always) cheapest, followed by a bank loan, and then a PCP. But when we say, cheapest, we’re thinking about the all-up cost of a loan. For lowest monthly payments, PCPs are usually hands-down winners because of the way they are structured.

If you’re the sort that prefers to change their car every three years for another new one, a PCP makes most sense. If, on the other hand, you’re buying a new car that you plan to keep for four years or longer, then hire purchase will save you money in the long run.

But if you’re a good credit risk (you have a steady job, own property and have a good track record of repaying loans promptly) and you want the freedom that paying cash brings, then a personal loan will suit you best.

Whichever you choose, the golden rule is never to rush in. Take time to compare deals of different types, across a range of lenders. Once you’re happy – and only then – pitch in.

For more great buying advice and to view and buy thousands of new and used cars, click on to motors.co.uk