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Introduction
Credit for cars is one of the biggest areas of consumer credit after home mortgages,
and the market is split between traditional loans and other finance schemes such
as Hire Purchase and Personal Contract Hire. In order to decide which type of
loan you need, you will need to consider what your plans are for the car. The
important question before entering into a credit agreement or taking out a loan
is 'Can I really afford it?? If you're in any doubt at all about whether you can
meet the costs then it is advisable not to sign it. Choose a cheaper loan, a credit
agreement with lower instalments, or even a cheaper car that you can buy outright
with a one-off payment. Understanding the options and the jargon is the first
step in negotiating the finance.
Choosing
the right finance for you
Decide whether
you want to own the car at the end of the repayment period, or whether you will
want to swap it for a newer one. Calculate what you will actually be paying for
the car in total - the actual cost of the finance scheme - and how much deposit
you can afford. If you don't have much money for a deposit, consider personal
contract hire schemes. These work like a hire agreement, and at the end of the
payment period the car is handed back to the dealer. If you can afford a substantial
deposit, a hire purchase scheme is worth considering. The monthly payments will
be lower, and you can own the car at the end of the period. Remember that all
long-term payment schemes are based on the initial purchase price of the car.
By the end of the payment period, the car will be worth considerably less! Most
hire purchase or personal leasing agreements set mileage restrictions. Exceeding
these can incur financial penalties.
This guide outlines
the main options available, and tackles some of the most frequently asked questions
about car finance. What you need to know
Don't forget to
check if the interest rate is fixed or variable.
With some schemes
you're not buying the car but renting it on a long-term basis!
Decide how much
you can afford to pay per month. Paying off a loan adds to your costs, so try
to repay it as quickly as possible - total interest charges are lower for short-term
loans.
Borrow only what
you can afford to repay, and always try to put as much of your own money as possible
towards buying the car.
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Loans
There are two main
options. The simplest 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. Always compare like with like - if you need
to borrow ?5,000 and would like to repay the loan over three years; ask each lender
for details of the APR (Annual Percentage Rate) on a loan of this amount. The
size of the monthly repayment over 36 months, and the total amount repayable.
The other is to opt for dealer financing and there are several different options
available:
Unsecured Loan
- Buying a car outright with an unsecured personal loan can be a convenient way
of making your purchase. Unsecured loans are normally repayable on a monthly basis,
although you can now pay some on weekly basis at a fixed rate of interest. They
are not linked to any security, such as your property, hence the use of the term
unsecured. The upshot of this is that the lender will have little option but to
sue you to recover their money in the event that you fail to repay the loan in
full. Remember to look at the rates closely as some car sales companies will make
more out of the loan than they do from the car. This is why they try to pressurise
you into taking their finance.
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Hire Purchase
Hire Purchase (HP) or conditional sale The conditional sale is common at franchised
dealers. You pay an initial deposit, then the balance plus interest is divided
into fixed instalments over a fixed period. The vehicle is sold to you provided
all the payments are made, the car is comprehensively insured, and the car is
maintained in good condition. You only own the car when the last payment is made.
With Hire Purchase the terms are similar, but you hire the car with a final 'option
to purchase' fee payable at the end of the contract. Hire Purchase Hire Purchase
(HP) is a well-established method of financing the purchase of assets by businesses.
Under a HP agreement the customer will pay an initial deposit, with the remainder
of the balance and interest paid over a period of time. The finance company which
provides finance is known as the "creditor". It will purchase the asset on behalf
of the customer, who is known as the "hirer" The finance company owns the asset
until the final installment is paid for the asset.The benefits of Hire Purchase
are that the assets can be used immediately whilst allowing repayments to be staggered,
giving companies a better cash flow HP agreements are easily negotiated and available
The most up to date technology can be hired and used to increase company productivity
and efficiency The hirer can recover the writing down costs and VAT on the assets
There is a clearly defined financial commitment from the outset Security is on
the transaction that has been financed thus requiring no additional commitment
from the customer HP is not repayable on demand unless the customer defaults on
the agreement
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PCH
PCH - Personal Contract Hire If you are interested in a nearly new car, you may
consider Personal Contract Hire (PCH), also called Personal Leasing. This is a
long-term rental where maintenance is covered, but ownership of the car never
passes to the person paying the instalments. This may be suitable if you are self-employed
- ask your accountant for advice. 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.
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PCP
Personal Contract Purchase (PCP) You pay a deposit (up to 20% of total), followed
by agreed number of low monthly repayments for up to three years. A final payment
must then be made. This is agreed at the start and is known as the Guaranteed
Minimum Future Value (GMFV). At the end of the agreement that you can keep the
car, hand it back, or part-exchange it for another new car. PCP is available for
new and nearly new cars only. If you want to keep the car you must pay the GMFV.
If you hand it back, you owe nothing more, however you won't have your deposit
or payments refunded. The disadvantages are that the GMFV could be quite a high
amount (especially if the dealer has been over-optimistic about the resale value
of the car). You could end up with neither car nor money, you would have to maintain
the car to the manufacturer's standard, and your mileage may be restricted. If
you part-exchange the car, the dealer will value it. If it's worth more than the
GMFV, he'll put that amount towards the deposit on your next car. But if it's
worth less you won't have to make up the shortfall.
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Conditional Sale
This is the most common form of car finance after PCPs and is what most customers
describe as Hire Purchase. As the name implies, Conditional Sale means that the
vehicle is sold to the customer subject to certain conditions, which typically
include:
All the payments are made, and made on time
The vehicle is comprehensively insured at all times
The vehicle is kept in good condition
The customer starts by paying a deposit followed by the balance plus interest
being paid in fixed installments over a pre-determined contract period – typically
36 months. If all the conditions are satisfied, full ownership passes to the customer
when the final installment is paid.
As the customer does not own the vehicle until all the conditions have been met,
the lender still has the right of repossession, should the customer be in default
under the terms of the agreement.
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Personal Leasing
Following the Value Added Tax changes in August 1995, the motor finance industry
developed Personal Leasing Plans PLP.Personal Leasing is just a glorified term
for renting the car. You will not have to worry about M.O.T's or repairs as this
is all included in the lease agreement and at the end of the lease, you return
the car. One important thing to look for is the amount of miles you are restricted
to each year so make sure it is enough for your needs. If you go over the mileage
they will charge you around 5p per mile, so it can be very expensive.
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Part Exchange
Part Exchange - If you have a car already, give it a good clean inside and out
when you go to part exchange it. This can make a large difference to the price
the dealer will give you. Most places will part exchange your old car against
another vehicle. You are often best trying to sell your car privately first, as
you will normally get more for it.
Loans and personal
leases are both solutions for people without a large amount of freely available
money to buy a car but which one is right for you depends on your own preferences.
One of the key differences is the cost. You'll often find that for the same car,
a loan works out cheaper in the long run, but has a higher monthly payment than
leasing. This is particularly true for the more popular cars that are mass-produced
and therefore depreciate in value quicker. However, for brand new, prestige cars
that depreciate at a slower rate, you may find that a personal lease is cheaper
in the long run.
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The
right finance - at the right price
Always read the
terms and conditions of the scheme and shop around. Firstly, there is the Annual
Percentage Rate (APR) which all lenders must quote by law. The lower this figure
is, the cheaper it is to borrow the money. Then there is the Repayment Period.
For example, ?200 a month over three years (total repayment ?7,200) is ?1,200
more than ?250 a month over two years (total repayment ?6,000). The faster you
repay the money, the less it costs you. Finally, compare any finance arrangement
fees and penalties that could be imposed for exceeding a mileage limit, repaying
early or returning the car in poor condition. You need to compare the cost of
the car had you bought it outright for cash with what you will pay at the end
of the agreement. The difference between the two figures will give the total cost
of borrowing the money. Go with the best deal, but first read all the small print.
About Credit
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Credit checks
The lender will
ask for relevant facts concerning home, mortgage, income, bank and credit card
accounts and details of any other outstanding debts. The lender acquires information
from a credit reference agency, which use public records to confirm your identity
and address. They check for debts registered over the previous six years and any
county court judgements (CCJs) against you. Any information on you shared by finance
companies; banks and other lenders will be assessed. Should credit be refused,
ask the finance company why your application was turned down, and whether you
have failed the credit checks. You have the right under the Data Protection Act
to search your record at the relevant credit reference agency (the lender must
supply their details) and to correct any errors in your record. There is no 'blacklist'
as such; just a process called 'credit scoring' based on many different factors.
You can find out what these factors are by viewing your credit record. Most lenders
use similar methods of credit scoring, but different lenders have different loan
policies. You may be turned down by one lender but accepted by another ? although
you'll probably pay a higher rate of interest if you are rated a high-risk borrower.
What if the
car is faulty?
Keep paying the
instalments, otherwise you will be in breach of the credit agreement. First ask
the dealer to rectify the fault. If the car is still within warranty, repairs
will be carried out at no cost to the dealer or you. Buying a car via a credit
agreement means that the lender has a responsibility to ensure the quality, fitness
and description of the vehicle before entering into a contract. Also, as the car
belongs to them, it is in their interest to rectify any major faults.
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Cancelling a credit agreement
Most credit agreements
can be terminated, provided you act quickly. There are details on the contract
document and notice of your rights to cancel should also follow a few days after
signing. However, if the documents are signed on the dealer or lender's premises,
you lose the 'cooling-off' period in which you can cancel without penalty. The
agreement can be legally terminated at any time, if you are not the owner of the
car until the last payment is made (as is the case with Conditional Sale and Hire
Purchase agreements). Provided you have paid half the credit price of the car,
you can simply hand it back. However, you will lose all the payments you have
made to date, and will be liable for further charges if the condition of the car
is poor. If you haven't paid half of the credit price of the car, you will lose
the car and still be liable for any outstanding payments. Generally, this is the
worst case scenario of a credit agreement.
Summary
Although most people
only think of their bank or the dealer for finance, shopping around for a number
of quotes for car finance providers can save you money. Try to compare three different
options to secure a good deal in perhaps the same way you would for car or home
insurance.
You may find that shopping around for the best car finance rate can be a hassle.
You want the lowest repayments possible with a finance company you can trust.
Auto Trader have made this process a whole lot easier with its revolutionary loan finder. You can compare loan & car finance rates from over 400 lenders and
car finance companies. Just enter your details on the screen and quotes will automatically
be returned from a variety of lenders and car finance companies. Car finance may
also be available for users who have a poor credit history.
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Car Dealers
Some experts have
suggested that you initially not inform the dealer how you plan to finance your
car — that you wait until a price has been established, then tell them that you
want to lease. Don't do it! It's old advice and it doesn't work well anymore.
Up front, let the
salesperson know that you want to lease, that you consider yourself well informed
about leasing, that you are knowledgeable about the car model you've selected,
that you want to discuss selling price, not monthly payments, and that you are
not interested in playing games.
Let the dealer
know that if you can get a good fair deal, you'll lease today. Otherwise, you're
willing to walk out and find another dealer or leasing company who will give you
the deal you want.
The three key advantages
you have and should use in any negotiation are:
• Your time to
prepare
• Your ability
to shop around
• Your ability
to walk away
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Prepare to Negotiate
If you've already done your homework, this process will be as smooth as silk.
If you haven't, the process could be long and painful, not to mention expensive.
First, you should
negotiate the lease price (cap cost), having a specific target price in mind (see
Know What to Pay). Don't let them tell you that price isn't negotiable in a lease.
It's an old trick. Unless you're wanting a top-selling car that's in short supply,
price is always negotiable.
Since the dealer
only controls selling price, don't expect to get very far trying to negotiate
residuals and money factor, which are controlled by the leasing company, for which
the dealer is just acting as an agent. You can, however, ask if they work with
other leasing companies who might offer better terms — or you can shop for another
leasing company, bank, or credit union on your own. Or let one of the new online
services, such as LeaseCompare, do the work for you, for free.
Next, you should
ask about any rebates, advertised specials, factory-to-dealer incentives, or discounts
that would reduce your cap cost. Tell them what down payment, if any, you would
like to make and negotiate a fair price for your trade-in (you should already
know its wholesale value). Ask about any acquisition fees, disposition fees, or
other charges that would affect your cost.
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So You Got the Deal
Finally, ask them
to calculate your monthly payment amount, less sales tax, based on all the figures
that have been agreed upon. While the salesperson is gone to check with the Finance
and Insurance (F&I) Manager to calculate the numbers (salespeople don't make these
kinds of calculations), do your own calculations. When he returns, it's very important
that you check their payment figure against your own.
Make sure you're
using the same cap cost, residual, money factor, and term as the dealer is using.
If there is a discrepancy, have them explain their calculations in detail, step-by-step.
Often, the difference is a "mistake," some previously unmentioned extra charge,
or you weren't given the correct credit for your trade-in.
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When No Negotiations Are Required
Now that you know
the essentials of negotiating a lease deal, you should also know there are times
when little or no negotiating is required.
When you find good
lease deals being advertised in the newspaper or on TV (see Where Are the Deals),
these are packaged deals jointly sponsored by the dealer and the leasing company.
These deals are usually already good deals and usually require no further negotiating.
In fact, even if you wanted to, negotiating is often not possible due to the special
conditions required to offer the deal. Typically, every element of the deal —
lease price, term, money factor, residual, vehicle make and model — is already
set and can't be changed.
Usually these advertised
deals are better than you could negotiate yourself. So, keep a sharp eye on those
ads.
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Negotiating Tips
Following are some
important tips that may help you in your negotiations:
Always negotiate
price, never monthly payments
Always negotiate
price UP from dealer's cost, not DOWN from the sticker price
Never let the dealer
tell you that lease prices are not negotiable
Never, ever tell
the dealer what monthly payments you can afford
Always come prepared
with the dealer invoice price for the vehicle you want
Always come knowing
what your trade-in is worth
Never let the dealer
tell you your source of invoice prices is wrong
Never, ever give
the dealer a deposit on a car during negotiations
Never give the
dealer a chance to "lose" the keys to your trade-in
Don't sign any
kind of "purchase/lease agreement" until you've settled on a deal
Never reveal your
attraction to a vehicle ("I just love that car") during negotiations
If you're not comfortable
with the salesperson, ask for another, or leave
Always give yourself
the option of walking out if negotiations don't go your way
Let the dealer
know up front that you are knowledgeable about leasing
If you sense the
salesperson is playing games with you, ask them to stop
Don't agree to
extended warranties, credit insurance, or add-on services
Always check the
dealer's monthly payment figures against your own figures
Generally, it's
best to deal at the end of the day, at the end of the month, on a weekday, on
a rainy day, or any slow period
Never accept an
offer to take a car home overnight before you've settled a deal
If you become tired,
confused, intimidated, or pressured during negotiations, you're doomed
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