Don't let a rough deal take the shine off your new car

As '05 number plates hit the road, Esther Shaw sees how motorists can save hundreds of pounds if they bypass showroom loans and put themselves in the driving seat
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Indy Lifestyle Online

Motorists poised to spend millions on new car registrations this week will need a steer towards a good finance deal to avoid being taken for a ride.

Motorists poised to spend millions on new car registrations this week will need a steer towards a good finance deal to avoid being taken for a ride.

More than 400,000 people are expected to pick up a new car from this Tuesday. Whether it's a sporty little number or a reliable runaround, most buyers will probably have spent more time choosing the type of car and the colour they want than working out the best way to pay for their purchase.

If you're in the enviable position of having enough savings to buy the car outright, you won't need to think about a loan at all. But most of us will have to borrow at least part of the money.

If you're about to take a trip to the car dealer and intend to pay using its own loan finance package, you'll save money if you hit the brakes now.

Carry on regardless and you could end up paying way over the odds thanks to overpriced dealership finance or an uncompetitive personal bank loan.

Motorists in the UK are wasting more than £6bn annually by signing up for expensive showroom deals instead of opting for a cheap personal loan, according to research from the price comparison website

Yet one in six motorists use dealer finance when buying a car, says the Alliance & Leicester bank - and alarmingly, two-thirds of this group have never bought a car any other way.

More than half think it is the quickest and easiest way to buy, while one in six believe it gives them the most competitive deal. This is a myth: car dealers rarely offer good value in comparison with other payment methods.

A typical car finance or hire-purchase scheme will involve you placing a deposit of around 10 per cent. The balance is paid off in monthly instalments, usually over a four-year period.

But showroom deals can carry high interest charges - more than double the best rates available elsewhere on unsecured personal loans.

Typical deals on offer, including incentives such as "nothing to pay for the first 12 months" will come at a price. In effect, the consumer can end up paying substantially more than their brand-new car is actually worth.

"Take the time to look for the best personal loan deals before committing yourself," says Michael Senior from Bradford & Bingley broker.

Depending on your credit history, you should find a wide range of cheap deals to choose from in the UK loan market.

"Despite interest rates going up, there are still many low-rate loans at an annual percentage rate (APR) of less than 7," says Richard Mason, director of

For example, Lombard Direct Online and Alliance & Leicester both offer a 5.9 per cent deal. While you might see a great headline rate - which, legally, can be advertised only if at least two-thirds of applicants are eligible for it - be aware that you may not qualify if you have a chequered debt history.

When being offered a loan, always ask the lender to tell you the full amount you will repay during the borrowing term - not just the monthly cost - to give you an idea of the overall cost. Watch for extras offered with car purchase loans, for example, free car inspection, insurance or breakdown cover. While these products do add value, make sure it wouldn't be cheaper to buy them separately.

As well as being good value in its own right, arranging a personal loan in advance can give you great bargaining power to help get an even better offer at the dealership. The price you pay will vary between dealers, so think about haggling over the price and any discounts. Sainsbury's Bank estimates you could save £1,300 on a new car by honing your bargaining skills.

"But nearly one in three people planning to purchase a new car in the next six months don't intend to haggle at all," says the bank's spokeswoman, Valerie Wood. She urges drivers to do their research before heading to the showroom - using a service such as Target Price at "Buyers then know exactly how much discount to aim for," she says.

If you already have a personal loan or can't get a cheap deal, you could consider leasing a car instead. Two popular types of leasing - in effect, borrowing the car at a price - are personal contract purchase (PCP) and personal contract hire (PCH).

With the former, you pay a deposit and make low payments for an agreed period of, say, three years, to cover part of the car's cost. At the end of the contract, the car will be worth more than the final payment owing - and you then have the choice of paying off its remaining value and owning it outright, or starting another plan with a new vehicle.

This scheme allows you to drive away a new car every few years - so you don't have to worry too much about servicing costs. In the long term, though, you could end up paying a lot of money, particularly if the cost of credit is high.

Alternatively, PCH is a long-term rental offering a low initial and monthly payment over an extended period. You then hand the car back to the finance company when it reaches an agreed age and mileage.

The hire firm is responsible for repairs and servicing, and you don't have to worry about the vehicle depreciating in value. But be warned - penalty payments for mileage in excess of the agreed figure can be steep.

Additional reporting: Jessica Smith

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