Car buyers, don't take a shortcut on the finance deal

Don't accept a loan from the showroom for your new motor, says Emma Lunn. You can get a much better rate elsewhere
Click to follow

The arrival of the new "55" registration plates at the start of the month has sent motorists hot-footing it to their nearest showroom in search of a new set of wheels.

Whether it's a sporty little number or a reliable runaround, most will probably be more concerned with looking for their ideal car in their ideal colour than working out the best way to pay for it.

But unless you take a little time finding a good finance deal, you could end up spending far more than you should.

While the lucky few may be able to buy the car outright with cash, it is far more likely you will need to take out a loan.

Car dealerships usually try and sell you their own finance package, but this can be a very expensive form of borrowing. According to research from the Alliance & Leicester (A&L), British motorists risk wasting more than £18,000 over a lifetime by choosing showroom finance deals. And it's a waste because the average charge on these deals is an annual percentage rate (APR) of 13.3. This is more than twice the rate on offer from many providers of personal loans.

Findings from A&L show that one in 10 people use showroom finance because they are talked into it by the salesman, while more than a quarter say they have always bought their cars in this way.

A fifth think they will get a discount on the price of their car or some freebies, such as their road tax paid for, if they use the finance.

While dealerships typically entice buyers with a good price for the car they are trading in as long as they take out the finance deal, these deals rarely offer good value in the long run when compared with other payment methods.

Worse, in making offers to people with poor credit records, some car finance firms charge more than double the 13.3 APR.

Approved Car Finance, for example, has a typical rate of 29.9, which includes the offer of £1,000 part exchange and £100 cashback for applying online. But even with a poor credit score, you could still get a loan of around 18 per cent elsewhere.

If you are looking to make a purchase in the next few weeks or months, don't rush in. There are plenty of cheap personal loans to choose from, and using a price-comparison website likes moneysuper- can help you compare rates more easily.

"Accepting a showroom's finance deal rather than shopping around can cost motorists dear," says Stuart Glendinning from "With an interest rate drop last month, the cost of borrowing has never been so cheap - rates are now as low as 5.6 per cent."

For example, if you bought a new Renault Mégane for £15,980, and put down a 10 per cent deposit, you would pay £17,994 over three years with a Renault dealer's 13.8 per cent finance deal.

If you took out a personal loan from Northern Rock at 5.6 per cent instead, you would pay £15,635.

Be warned, though, that while you may see a great headline rate, you may not qualify if you have a chequered debt history.

Further, when being offered a personal loan, ask the lender to specify the full amount you will repay over the borrowing term - not just the monthly sum - to provide a fuller picture of the overall cost.

In some cases, a specialist car loan can work out as cost effective as a personal one. The AA, for example, offers loans at a typical APR of 5.8 per cent, for cars costing between £7,000 and £25,000. This also includes a six-month warranty that covers most models up to 10 years old and with 100,000 miles on the clock.

If you already have a personal loan for another reason or can't get a cheap deal, you could consider leasing, where you are basically borrowing the car.

One form of leasing is personal contract purchase (PCP), where you pay a deposit and make fixed low monthly payments for an agreed period.

At the end of the contract, you can choose to make an additional payment and own the vehicle outright, or return it and start a plan with a new car.

A good finance deal is especially important as the cost of running a car has doubled in the past 10 years, according to Sainsbury's Bank. Extras such as insurance, tax, fuel, breakdown cover and servicing (excluding any interest repayments on loans), it explains, add up to more than £2,000 a year.

Findings from the bank show that between February and July 2005, more than 370,000 people said that they planned to buy a new car - but would not haggle over the price.

Spokeswoman Joanna Mallon urges motorists to strike a bargain at the dealership: "You can save over £1,500 on the price of a brand new car by haggling."


Neil Williams, 27, from Chester, bought an Audi 83 for £9,500 from a showroom last December.

Before choosing the car, he worked out his budget and shopped around on to find the best deal.

"I calculated what I could afford each month over three years and that gave me a budget of about £10,000," he says. "I opted for a loan from Liverpool Victoria at a rate of 6.4 per cent.

"This was a lot more competitive than the deal being offered by the car showroom - which was nearer 11.9 per cent."

Neil put a £500 deposit down for the car and now pays around £200 a month towards paying off the loan. This figure would have been closer to £300 a month with a car finance company.

Looking for credit card or current account deals? Search here