It is an often quoted statistic that a car is the second largest purchase most of us make after our house. With such a major financial commitment you would think that we would be careful about how we finance our car but all too many of us are far too excited by the shiny new model on the dealer forecourt to worry about small details like that. That's a shame because understanding how finance works could actually boost your spending power and allow you to afford a better motor. So, here are five things that everyone should know about car finance.
Know your APR
It used to be much more difficult to compare the true cost of loans, credit cards and other financial products but thankfully the government has mandated that all finance companies must display the 'APR' of their products. This stands for 'Annual Percentage Rate' and is a measure of the interest you will pay on your loan. Put simply, if you borrow £1,000 for one year at an APR of 20% then you will pay back a total of £1,200. There are complications with the system and it is not perfect but what you need to know is that the lower the APR, then the less your loan will cost you.
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Consider the length of term
Many customers focus entirely on the size of the monthly repayment. This is understandable, as we tend to be paid and budget on a monthly basis and lower payments look much more tempting. But an attractive low monthly payment is sometimes achieved by lengthening the term of the agreement. In fact credit agency, Experian, has reported that loan terms are at an all time high. Long terms are not necessarily a bad thing in themselves but be aware of what you are committing to and consider whether your car, especially if used, will still be serviceable at the end of this term.
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Understand the finance agreement
Most of us understand car loans, especially now that we are aware of APR and the length of the term as described above but what about other finance packages, such as personal contract hire or personal contract purchase? These are leasing agreements and are popular because they often feature low monthly payments. The big thing you need to realise is that you do not own the car, unless you make a final balloon payment at the end of the deal. If not, then you are simply renting the car for a period of time.
Hidden fees
Look out for things like arrangement or administration fees, which may not be included in the APR calculations. There may also be late payment fees or other penalties. Personal contract hire and personal contract purchase deals often require big payments upfront in order to keep those advertised monthly payments down; make sure you know all the potential hidden costs.
As an aside, guaranteed car finance from specialist companies that deal with consumers with poor credit ratings will offer bad credit guaranteed car finance with one monthly payment which includes everything up front.
Get the total cost
Perhaps one of the simplest things to do is to ask for the total cost of the finance. If you are tempted by a £5,000 car, ask what the full repayment will be over a set term. Then you can decide if it's still worth it.
