Loans Guide

Compare car loans

By becca.talbot@consumerchoices.co.uk

Planning to buy a car on credit? We explore your options(Updated 19/9/09)

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

Compare car finance loans

This guide looks at all the finance options available - whether you’re going to buy a new car or a secondhand motor from a used car garage - including bank loans, balloon payments and dealership finance.

As always, it’s 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 secondhand motor or a new car straight from a dealership, when it comes to financing the vehicle, taking out a loan is an obvious option. But should you choose an unsecured or a secured loan?

An unsecured loan, sometimes called a personal loan, and available through independent lenders such as banks, means the loan is not secured on any asset you already own, such as a house, car or other assets, and so is a riskier prospect for the lender and therefore usually higher interest rates than their secured counterparts.

Unsecured loans are known as an “ordinary credit agreement”, which means you own the vehicle (and you can sell it, although you’ll have to keep paying for it after you’ve sold it). If you default on the payments, the loan provider can demand you pay back the money, but has no legal right to repossess the vehicle.

Compare unsecured loans

Advantages

• Medium interest rate - typically between 7% and 11% (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.
• You own the car from the start and it is your responsibility - you pay for repairs/servicing. You can also sell the car when you want.

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.

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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, but it is an option. As with an unsecured loan, you own the car from the start and it is your responsibility.

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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 (although this is dependent on your credit rating)
• • You can borrow larger amounts

Disadvantages

• Much longer repayment periods, and therefore, although the interest charges are low, the longer repayment period means you could pay more in interest
• 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.

Whether 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 by understanding your loan, it’s easier to compare it with other loans and make your choice.

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Dealership finance

Most car dealerships offer finance for both new and secondhand 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.

Dealership finance is a form of secured loan with the vehicle being purchased acting as security. This means the finance company owns the car until you’ve made the last payment and if you default on payments, the finance company will seek to repossess the vehicle.

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 higher 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 usually 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
• You do not own the car until you’ve made the final payment so you cannot sell the vehicle while still paying for it

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 repayments - 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% - but you may be able to use your old vehicle as the deposit if you trade it in
• The monthly payments will also be high
• With a 0% deal you won’t usually get a substantial discount on the price of the vehicle, so if you add extras such as alloys or a CD player, it may work out more expensive
• You may have to choose from a limited selection of models of cars the dealer is selling, usually the ones they’re trying to get rid of quickly to make way for newer models

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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 repayments, these loans usually charge 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.

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GAP insurance

When buying vehicles on a finance deal, the lender may offer you guaranteed auto protection (GAP) insurance at an additional cost. GAP insurance is a standalone policy for a single premium calculated on the value of the car when you buy it and the number of years you want the insurance to cover.

GAP insurance is designed to cover any shortfall from the proceeds of a comprehensive motor policy should a vehicle, purchased on finance, be written off and the insurance payout be less than the outstanding loan on the vehicle.

For example, if you borrow £18,000 and, after two years, you’ve paid the loan down to £12,000 but you write the vehicle off and the insurance company will only pay out £7,000, the GAP insurance covers the £5,000 you’d need to find to pay off the car loan.

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.

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.