Car Finance

Ok here’s another complicated subject made simple.  Car Finance is exactly like any other form of finance.  The less you actually need to borrow the money the cheaper it is.  Young person strapped up to your diddies with five credit cards and no equity ?  Expect to see a three figure APR.  Settled person with ten years of constant mortgage payments and clean credit history, looking to finance half the cost of your new fiesta ? (which you could pay for anyway) banks will fight to lend you the money.

The same rule applies to special offers for specific cars, there are always superb finance deals available for cars, but usually it’s a sales tool to help sell a car that would not be considered the best in its segment, I don’t really want to name manufacturers but you have seen amazing deals on not terribly desirable cars.

There are on paper, different types of finance but not really. Basically it is just the cost of borrowing money. Some agreements might suit you better because there is a small payment up front, or the deal runs over four years so keeps the payments down.  whatever way it is done it is all just borrowing money. Now people that regularly make poor finance decisions are not even reading this that is why they make poor finance decisions.  So as I am preaching to the converted I won’t go on. I’ll just give you the basics.

1/ All that matters is the total cost of the deal: Some people walk into showrooms with a figure of how much a month they can spend, say £200. A good finance manager can move figures around a page to put an extra year on to a deal or add a big deposit or balloon payment so that the car comes in at your target of £200. This should be irrelevant. You need to add up the entire cost of deal and decide if it is good value for you.

2/Try to keep the payments to as short a period as you can afford: borrowing for a car differs from borrowing for a house,  your house mostly goes up in value and is something you appreciate more as time goes on. Your car is a constant depreciator in value and in desirability.  No matter how nice a new car is, after a year it’s just another second-hand car and you will resent it if you have another three years left to pay it off.

3/Make sure every cost is noted when you tally your figures. Any admin fees or settlement figures are real money. Some deals can be expensive to get out of if circumstances change; now it’s hard to have a crystal ball but if you think you can’t go three months unemployed without defaulting on your payments, maybe you want to have a rethink on financing in the first place. It’s your money; I’m just saying a couple of grand can get you a nice car these days!

4/You should never need to take finance from a garage. Garages are not banks they sell cars not money,  they just happen to have a consumer credit license so are entitled to resell a banks product.  You should have spoken to your own bank or building society before you even look at cars and know how much the money is going to cost you.  After that, sure you can talk to the finance manager and see what they can offer but finance in a garage is another product that they sell to make money. It is not a free service they provide to their customers to help them into a car.  A garage earns a commission on finance and they have a base rate from their supplying bank, above this base rate they can add-on their commission 1%,2%,3% etc , sometimes finance is more profitable than the car sale.

If you have a good rate from your own bank you should let the garage know. They may say fine work away,  however many garages have stocking loans in place with finance companies and even if they can’t personally profit from a deal it is in their interests to drive business towards their finance company,  in which case the finance company may offer to beat your deal just to get you onboard (not by a fortune but a few quid is still better in your pocket)

5/ You should really try to avoid filling out finance applications in multiple garages. Garages can be quick to pull out a finance proposal “just to show you some figures” and before you know it you have driven around a few garages for an afternoons browse and made five credit applications with different banks. All this information is available to banks and agencies seeking credit on your behalf,  and when they see it they presume you are a bit of a window shopper and their enthusiasm to chase after you with the best deal possible wanes. A garage should be able to give you a good estimate of what sort of deal they can do. Only when you are happy with the car and want to proceed should you let them actually make an application.

That’s pretty much my experience of car finance. As I struggle with a financial calculator I defer to people with more knowledge than me, If you are looking at getting the best deal on finance you should use Martin Lewis’

I Dont think Martin has a specific car finance thread but a trawl through his finance deals or a search on the forums will give you heap of solid advise.

Car Leasing is a completely different subject(and worth considering if you are financing)and I will look at that in another post.