There are two main borrowing options available to you: getting a loan or opting for dealer financing. Here we explain the difference between the two options and highlight the hidden costs involved...
The simplest option is a loan from a bank or building society, where an amount is borrowed to pay for the car outright, and this amount is paid back, plus interest over an agreed period, to the lender.
The other is to opt for dealer financing and there are several different options available:
- Hire Purchase (HP) or Conditional Sale
- Personal Contract Hire (PCH)
- Personal Contract Purchase (PCP)
Hidden costs
Documentation fees are added to payments at the beginning, or end of the agreement.
This administration cost should be clearly detailed and can be anything from £50 to £100.
Caution: Dealers offering loans for very low deposits get high commission for these sums, and the interest rate may be unfavourably high.
Loans
Available from banks, building societies, credit card companies and finance companies. Loans can be secured — something of value (usually your home) forms security for the sum borrowed.
A secured loan is cheaper than an unsecured loan; the interest may be lower, the amount borrowed higher and the repayment period longer.
An unsecured loan is not backed by any security, and the rate of interest is usually fixed.
Interest rates and repayment conditions vary. They tend to be more favourable from building societies and banks, who only lend money to people they consider to be good credit risks.
Finance companies, who are less fussy about whom they take on, charge highly to cover the risk of default on payments!
If your application is accepted, you sign an agreement and the money is paid either direct to you, or as a banker's draft in the name of the dealer.
Payment protection
Loan insurance costs a small monthly premium. Most policies cover loss of life, sickness and unemployment or redundancy. Usually offered by banks and finance companies.
If the loan is not protected, and your ability to keep up the repayments is threatened, contact the lender before you fall behind.
Most lenders will try to restructure the agreement to ensure that it is not terminated.
Next - Pros and cons
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