| 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.
Top
of page
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. Top
of page
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 Top
of page
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. Top
of page
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. Top
of page
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.
Top of page
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. Top
of page
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.
Top of page 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
Top
of page
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.
Top
of page
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. Top
of page
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 Top
of page
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. Top
of page
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. Top
of page
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. Top
of page
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
Top of page | 
