F - Finance

05 June 2006

Finance - There are a large number of ways to raise money in order to buy a car. A dealer can usually arrange a loan as part of the deal. The most simple is Hire Purchase (HP), where the amount borrowed is divided into a series of monthly payments, typically over three years. This is a secured loan, and only after the final payment will the finance company cease to have any legal claim on the car. If you default on your payments, it could be repossessed.

A Personal Contract Purchase (see PCP) is similar, but a large portion of the loan is deferred until the end of the agreement. This has the advantage of lower monthly payments than HP, but that final balloon payment is waiting as a sting in the tail.

Unless the dealer can offering a special finance rate, such as 0%, your monthly payments could be lower if you borrow from a bank or building society on the high street or the internet. A loan from one of these sources would be unsecured, so the lender would have no claim on your car. (See Bank loan.)

When comparing finance deals, don't just compare the monthly payments. Salesmen can often make a loan look cheaper by extending the loan period and so bringing down the monthly bill, but over the lifetime of the loan you'll end up paying more.

The APR (Annual Percentage Rate) and the total amount payable are the best figures to compare. The latter will include any fees.

Remember, too, that whatever figures a dealer puts on the table aren't set in stone. If you've been offered a more competitive rate elsewhere, use it to haggle your way to a better finance deal.


Want to know the difference between your APRs and your PCPs? Our Glossary will guide you through the minefield of car-buying terms.

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