Guide to Financing a Car

Personal loans

Car loans are becoming a thing of the past as all-purpose borrowing means motorists can get money for a new set of wheels from banks, building societies, insurance companies, supermarkets, online lenders and car dealerships.

Only five finance houses still offer specially branded car loans – the AA, Halifax, Co-operative bank, NatWest and Ulster bank in Northern Ireland.

All five offerings come with motor-related extras to justify their titles. With the AA, borrowers get free car inspections worth up to £174, while Co-operative gives free roadside assistance with Green Flag and makes a donation to environmental charity Climate Care for every customer. Halifax offers 25 per cent off RAC membership as well as discounts on services and MoT tests at selected garages.

But whether these loans are value for money depends on the lender and the amount borrowed. Check the interest rates and the repayment terms against standard loans.

Beware, too, of loans from the car dealership. They can prove a false economy and you could end up paying thousands more in interest over the life of the loan.

It makes sense to use the Internet to shop around for the best loan provider.

The best place to start comparing loans is the annual percentage rate, or APR. This includes charges for setting up a loan and interest. All loans have to quote an APR. However, it often does not include the cost of insuring a loan against injury or an accident that leaves you unable to meet payments, so it may be misleading. When you receive a quote, look at the total amount payable for a clearer picture.

Hire purchase

Hire purchase often looks attractive to less affluent car buyers who don't qualify for personal loans. A deposit as low as £100 is followed by fixed monthly instalments (technically hire fees) over a two- to five-year term, and a final 'purchase option' payment. Only then is the car yours.

Most manufacturers offer an HP deal and ask for a minimum 10pc deposit or some form of part-exchange.

HP allows you to spread payments, and the rate of interest may be less than with a loan. APRs vary depending on the manufacturer, the term over which you set the agreement and the cost of the car.

PCPs

The major dealers also offer personal contract purchase schemes as a means of buying a new or nearly new car.

These schemes are popular because they offer lower monthly payments than HP. But they have large 'balloon' payments that must be made when a contract ends. You put a deposit down on the car and pay fixed, regular payments over a specified term. When the term ends, you can either make the final payment to own the car outright, trade it in for another one or give it back with no more to pay.

PCPs predict a future value, based on your mileage, to calculate your final payment. They have been criticised because you are tied to the same manufacturer if you decide to have another car after the term finishes. You do not own the car until you make the final payment, and you may also be penalised for high mileage.