Car Loans
Buying a new car can be a costly exercise. This helpful guide provides visitors with an expert insight into the car loans market.
UK Car loan options
Most of us living in the UK today own at least one car per family, often more. Apart from buying a house, car purchase is usually one of the most expensive acquisitions we are ever likely to make and invariably some sort of car loan or finance is required.
There are several ways to obtain car loans, but the two main routes available to an individual are either to take out some form of car finance, which would normally be arranged through the garage or dealership from which the vehicle was purchased, or to arrange your own finance for the car, through a variety of personal car loan options.
Dealer Arranged Car Loans
Firstly we will take a look at car finance deals available through dealerships. This type of car loan will take the form of a hire purchase agreement, with the loan being secured on the vehicle in question. These arrangements can vary greatly in cost, depending on how keen the dealership is to sell a particular model. If purchasing a brand new car, a dealer may even be able to offer 0% finance on a vehicle. This seems a very attractive proposition, but usually a large deposit is required, often up to fifty percent (this could be the trade in value of your old car), and such car loans are usually for a relatively short term, which has the effect of increasing the monthly repayments.
Other finance deals may be arranged whereby payments are made for two or three years, to pay off part of the car loan, but there is then an outstanding balance to be paid off as a lump sum at the end of this term. This is a method adopted by dealerships which is designed to tie an individual into remaining with the same car manufacturer. Rather than repaying the lump sum after the chosen period, a new car is sold, with a new finance agreement being arranged, which rolls up the existing finance into the new deal and the value of the old car is used to offset the total cost. The more conventional hire purchase agreement through a dealership, whereby the monthly repayments are designed to repay the loan in full after a fixed term, can often work out quite expensive, due to high interest rates.
All the above types of car finance are usually underwritten by one of the many large, well known, finance houses which exist in the UK today. Before you sign up to a hire purchase agreement through a dealership, read the small print carefully, checking things like the Annual Percentage Rate and any penalties and make sure you are fully aware of the commitment you are entering into. Remember that the salesman often gets paid as much commission for the finance deal as he does for the sale of the car.
Personal Car Loans
The other alternative when taking out car loans, is to arrange your own finance through a personal car loan. This type of loan could take any number of forms, depending on the amount to be borrowed and may not necessarily be secured on the vehicle being purchased. For example, an unsecured personal car loan could be taken, where the lender does not require any security at all for the loan. This would normally only apply on smaller loan amounts over a relatively short time period.
Secured Car Loans
For someone who owns their own home, a secured car loan could be taken on their property. With house prices rising dramatically over recent years, many homeowners find themselves in the situation where they have a large equity value in their home, over and above any outstanding mortgage balance. This equity may be released in the form of a secured car loan, which could be in the form of a free standing loan alongside the existing mortgage, a further advance from the existing mortgage company or even a full re-mortgage.
These types of
secured loans can seem extremely attractive, as the interest rates charged are usually relatively low compared with other types of finance and the term can be extended over a longer period, which has the effect of reducing the monthly payments. However, a note of caution should be sounded at this point. By taking a loan over a longer timescale, although the monthly repayments may be less, the overall cost of the car loan could be considerably higher, due to the fact that interest is being charged for longer.
The other downside to the secured car loan route is that an individual may change their car every two or three years, whereas a loan secured on property may often be taken for a term of ten years or even more. This means that someone could have an outstanding car loan long after the vehicle has been sold.
In summary, it is important to research the car loans market thoroughly before committing to a particular course of action. There are many attractive car finance deals available through dealers, however a potential borrower arranging their own finance has a much wider range of options to chose from. It is worth spending some time comparing the different types of car loans available, taking into account all the factors, not just the monthly repayments, to ensure that you obtain the best possible car loan to suit your own personal circumstances.
