CAR finance is a bit of a maze, so when you're sitting with a salesperson in a dealership and they're rattling off figures and quoting monthly premiums, it's easy to get carried away.
The main question to ask yourself before you buy a new car is: "Can I really afford it?"
Payments of £150 or £200 per month don't sound such a big outlay. But with insurance and running costs on top of this, it soon adds up.
The main thing to look for when taking finance is the annual percentage rate (APR). Whenever you consider finance, this is the key to how much you will pay back over the term of a loan period. APR varies from lender to lender, so the best thing to do is shop around. And whether you're talking to a bank or car dealer, make sure it quotes the APR.
There are three common ways to purchase a new car. The first is with a personal loan. Available from banks, building societies, credit card companies and even supermarkets, to name but a few, they're a popular choice for many. A secured loan is cheaper than an unsecured loan and interest rates and repayment conditions vary. Banks and building societies are your best bet as they usually lend money to people they consider good credit risks. However, many finance companies aren't so picky, so charge higher premiums to cover the risk.
The conditional sale is common at franchised dealers. Buyers pay an initial deposit, then the balance, plus interest is divided into fixed instalments over a fixed period. The vehicle becomes yours to own once you make your final payment.
With hire purchase (HP), the terms are similar, but you hire the car with a final `option to purchase' fee payable at the end of the contract.
If you don't have much money for a deposit, maybe personal contract purchase (PCP) is for you. PCP is normally arranged through the dealer. This scheme comes in many guises and is given names such as `options' or `selections'.
You pay a deposit and agree a figure of what the car will be worth at the end of a period - usually three years. This is called the future guaranteed value (FGV). By subtracting the FGV and the deposit amount from the car's price, and adding the interest, you'll get your monthly premium figure - which usually works out lower than other finance schemes. After the designated period, you either pay off the FGV with an optional final payment, give the car back or even trade up to another model.
The disadvantages with these schemes however are that with some, you are not buying the car, simply renting it on a long-term basis.
Another downside is the FGV could be quite a high amount - especially if the dealer has been over-optimistic about the resale value of the car. You also have to maintain the car to the manufacturer's standard and your mileage is often restricted.
Whatever you choose, make sure the finance plan is right for you. And don't be too concerned if the first lender you approach turns you down as some lenders can be choosy. But if more than one refuses you finance, stop applying and find out why.
Next week it's time to get the best deal on your car. We'll look at main dealers, car supermarkets, importers and what deals they can offer.
