A Young Drivers Guide to Car Finance

You’ve seen the car you want at a price you can afford, the question now is how are you going to pay for it? The answer to a large extent depends on whether you’re buying a new or used car.

If you plan on buying a used car and keeping it for at least four years, a straight loan or hire-purchase agreement will cost less in the long run.

If you intend to buy a new car and keep it for less than three years before replacing it with another new car, you should consider a personal contract purchase plan.

Personal Loan
You’ll take this out in advance to buy the car outright then repay the debt in agreed monthly installments.

There are two types of personal loans, secured and unsecured. Secured loans are cheaper, have a lower APR rate (the interest you have to pay on the loan) but if you fail to make your repayments the lender can confiscate whatever you have offered as security, which is usually your house.

You will need a regular income and will need to be over eighteen years old.

Hire purchase
You pay a deposit followed by a fixed amount for an agreed number of months. Once you have finished these monthly payments you legally own the car.

As a rule Hire Purchase is only available for new and nearly new cars. You must be aware that until you have made the final payment, the bank, car dealer or loan company still owns the car. Until then, you cannot sell the car without obtaining permission. If you fall behind by as little as two repayments, the finance company can repossess the car.

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 loans pay close attention to the APR.

Personal Contract Purchase
This is available for new and nearly new cars only. You pay a deposit (up to 20% of the total price), followed by agreed number of low monthly repayments for up to three years, at which time a final payment must be made. This figure is agreed at the start and is known as the Guaranteed Minimum Future Value (GMFV). At the end of the agreement you can keep the car, hand it back, or part-exchange it for another new car.

If you want to keep the car you must pay the GMFV. If you hand it back, you owe nothing more but you won’t have a penny of your deposit or payments refunded.

In effect this is a lease agreement. The car belongs to the finance company until the contract ends. If you end the agreement early, you may have to pay a penalty. Usually the car is subject to agreed annual mileage limits with a penalty if you exceed them, must be properly serviced and kept in good condition.

Whatever finance option you decide on always read the terms and conditions to make sure you understand how much your loan will cost in total. Under the new Financial Services Authority regulations these must be clearly visible and explained in plain English.

Remember a loan over a longer period of time might seem tempting due to the lower monthly payments but due to the APR accumulating you will end up paying more in the long run. Always work out in advance how much you will end up paying overall for your car loan.

Sometimes car dealerships will offer zero or very low interest rates. Approach these with caution. It may mean you lose out on discounts or extras that someone with another type of loan will get. Also the amount of deposit required for such deals can be high.

Whatever loan or finance deal you take out it is likely that you will be asked to take out Payment Protection Insurance. This insurance against you be unable to meet your payments. Before you agree read the Terms and Conditions very carefully. Most PPI’s won’t offer to pay the full amount you owe if you fall on hard times. The conditions can be harsh.

Never accept the first finance deal offered by the dealer as this will try 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, to shop around lenders to get themselves a better commission, can use this information. You should shop around for yourself.

You should also bare in mind that when it comes to costing a car you should also include the likely running costs of the car - young drivers car insurance road tax, fuel costs, servicing and so on.