Loans Guide

Car loans: what are the options?

Article updated: Friday 5 June, 2009 By becca.talbot@consumerchoices.co.uk

If you’re looking to buy a new car on finance, it’s important you look at all the options available, and shop around for the best deal.

Compare car finance loans

According to recent figures from the Society of Motor Manufacturers and Traders (SMMT), over 35,000 car orders were made through the government’s scrappage scheme it it’s first month, with motorists taking advantage a £2,000 payout for trading in their old bangers for new models. A new car will cost more than £2,000 though, so what finance options are there to help with your purchase?

This article looks at all the finance options available - whether you’re going to buy a new car using the scrappage scheme, or a second hand motor from a used car garage - including bank loans, balloon payments and dealership finance. As always, it is important you weigh up the advantages and disadvantages of the different types of car finance available. Interest payments can be costly in the long run and you need to be sure that you can afford the repayments.

• Unsecured loans
• Secured loans
• Dealership finance
• Car finance companies
• Our recommendations

Unsecured loans

Whether you’re looking at buying a second hand motor or a new car straight from a dealership, taking out a loan is one option when it comes to finance. But should you choose an unsecured or a secured loan?

An unsecured loan, sometimes called a personal loan, isn’t secured against anything, so your house will be safe if you can’t keep up with your repayments. They are popular with people who can’t afford to risk losing their home, or with people who don’t own any property.

Compare unsecured loans

Advantages

• Low interest rate – typically between 6% and 9% (dependent on your credit rating). This is a reflection of the low risk posed by people with a good credit rating
• You won’t lose your home if you can’t keep up repayments
• Straightforward monthly payments
• You can borrow between £1,000 and £20,000.

Disadvantages

• You need to have a good credit rating
• Unsecured loans for those with poor credit ratings will have higher APRs – typically around 20%
• You will be charged a fee – usually two month’s interest – if you settle your loan early.

Back to the top

Secured loans

Securing your loan against your home allows you to borrow more, at a lower rate. This type of loan is usually for amounts of more than £20,000. You shouldn’t need to get a secured loan for a car as an unsecured one should provide you with more than enough money, however it is an option.

Compare secured loans >>>

Advantages

• If you have a poor credit rating you are more likely to be approved for finance if you are willing to secure the loan against your home
• Low interest rates (this is dependent on your credit rating)
• Allows you to borrow larger amounts, so could use the extra money for something else, such as the insurance for your new car.

Disadvantages

• Much longer repayment periods, and therefore interest charges
• If you have a poor credit rating, you may not be very good at managing your finances so probably shouldn’t take out a loan against your home
• You could lose your home if you can’t keep up repayments.

If you take out an unsecured or a secured loan, you will have to choose how you want the interest to be charged. Choosing a variable interest rate could see your repayments decrease over time, however they could also increase, so it’s important you weigh up the risks.

Choosing a fixed interest rate will make managing your car loan a lot easier, as you’ll know exactly how much you’ll have to pay with each monthly instalment. You’ll also know exactly how much your loan is going to cost you before you sign up for it, so it’s easier to compare it with other loans and make your choice.

Back to the top

Dealership finance

Most car dealerships offer finance for both new and second hand cars, however before signing up to one of these it is important you review all your options.

Don’t let a salesperson rush you into making a decision, and make sure that you always ask for the APR as this is the only way to compare loans. Don’t make a decision on the basis of weekly or monthly payments as this won’t tell you how much interest you’ll eventually end up paying.

Read below find out about balloon payments and 0% finance deals.

Advantages

• Taking finance from your dealership can save the hassle of applying for loans
• Dealership finance deals can be competitive but you will need to shop around
• You may get a discount off the car if you take their finance deal, but be wary of these offers as you may end up paying for the discount in interest payments.

Disadvantages

• Most dealerships quote finance in terms of your monthly payments. You should always find out the APR so you can compare it with other loans on the market
• Discounted dealership finance usally comes with a higher interest rate so that the dealership still makes a profit. Work out the overall cost of the car, including interest and any special offers, before committing.

Balloon payments - Balloon payment schemes allow you to lower your monthly payments by agreeing to pay off a final lump-sum at the end of your loan period. You have to be realistic about your ability to make this final payment though, or you could end having to return the car or take out another loan to keep it.

Advantages

• Agreeing to make a final lump-sum payment lowers your monthly payments
• The deposit will usually be lower too
• No risk to your home.

Disadvantages

• You have to be able to make the final payment – usually around £3,000
• You could lose the car at the end of the loan period if you can’t keep up your payments - this means essentially you only hired the car, at a higher cost than hire purchase.

0% finance - Offered by the majority of dealerships, these deals are a great way of avoiding interest payments, but you will have to be able to afford the deposit and the monthly payments to be eligible.

Advantages

• Once you’ve paid the deposit, your monthly repayments won’t include any interest
• Therefore, overall your car will cost a lot less than any other type of finance.

Disadvantages

• The deposit will be quite a lot - usually around 35%
• The monthly payments will also be high
• You won’t usually get a discount on a 0% deal, so if you add extras such as alloys or a CD player, it may work out more expensive
• You’ll have to choose from their selection of cars.

Back to the top

Car finance companies

Car finance companies such as Welcome Car, Black Horse Finance, and Meridian Finance offer loans to people with poor credit history, county court judgments (CCJs) or arrears. Because there is a higher risk that these people won’t keep up with their payments, these loans usually bear higher rates of interest and are secured against the car itself.

Advantages

• Designed for people who need a car but would otherwise be refused a loan
• They give people something to secure their loan against if they don’t own a property or don’t want to put their home at risk.

Disadvantages

• Have the highest interest rates
• You will lose your car if you fail to make repayments.

If you have a poor credit history and are struggling to get finance for a new car, read our article on adverse credit loans for cars for more information.

Back to the top

Our recommendations

If you do your homework, choosing a car loan should be fairly straightforward. Take your financial situation into account and don’t commit to anything you can’t afford.

Whatever you do, make sure that you compare the APRs of all the loans that you’re considering so that you can see how much it will cost overall.

Bookmark with:

What's this?