New plates are here, but don't overpay on finance

The 59 car registration plate has arrived, along with a fleet of dealer discounts. But if you buy new, choose your loan carefully. Chiara Cavaglieri and Julian Knight report
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The Independent Online

The launch of a new registration plate is always a big deal in the car industry. This time around, with the industry just beginning to show signs of emerging from the recession, sales of the new 59 registration plates will be watched more closely than ever.

The manufacturers and dealers will be hoping that the Government's car scrappage scheme, introduced in May, will continue to work a miracle. The "cash for bangers" scheme offers up to £2,000 for those who trade in a vehicle more than 10 years old, weighing no more than 3,500kg, for new ones.

Figures show that the car scrappage scheme has had an impact with a total of 157,149 new cars registered in July, an increase of 2.4 per cent on the figure for July 2008, according to the Society of Motor Manufacturers and Traders (SMMT). However, the scheme has done little to address the problem of vehicle depreciation, which can wipe out the £2,000 incentive in a mere 88 days, according to figures from price comparison site uSwitch.com. Furthermore, there is a concern that funds allocated to the scheme will run out before the motor industry recovers its strength. Although set to run until February 2010, motorists placed 60,000 orders for new cars in the first month of the scheme, and many observers predict the grant money will run out soon.

Another issue is the end of the 2.5 per cent cut in VAT, scheduled to go back up to 17.5 per cent at the beginning of 2010. Taking all this into account, cutting costs when buying a new car is vital. Pre-registered cars are nearly new vehicles that have been registered by dealers who then sell them on to you – technically the second owner. These cars can have as few as 20 miles on the clock but cost about 20 per cent less. Also, if motorists have an exact model in mind, internet-based car brokers are worth a look because they bulk-buy popular models and can usually undercut dealers. Websites such as Drivethedeal.com list the various online car brokers.

Most new cars are sold at franchised dealerships where motorists' bartering skills are really put to the test. Armed with as much information as possible, motorists are in a much stronger position to negotiate. "Use the internet to check out not only models you're interested in but also to look across the range and to other manufacturers to see what they offer," says Luke Bosdet, a spokesman for the Automobile Association.

Motorists must separate three ingredients, Mr Bosdet says – the car itself, part exchange and finance. "What the salesman will try to do is combine all three, but this often means you'll be losing out in some way. He might offer you a 10 per cent discount on the car but you may not be getting the best deal on the finance," he says.

Many motorists opt to trade in their cars but in most cases they can get more money by selling privately. Glass's guide offers car valuations online at www.glass.co.uk. The most important thing to remember is that there is usually room for manoeuvre on price and never more so than in the current climate. Extra incentives can be negotiated such as free car insurance or breakdown cover. Always check the manufacturer's warranty: most now offer three years but up to five years can be had. Insurance is another factor often overlooked by car buyers but it is important to get an insurance quote before putting a deposit down to ensure that the premium is still within budget.

Taking out expensive dealer finance or a personal loan from your own bank are two of the classic errors made by car buyers. Esure has found in a recent survey that 68 per cent of new car buyers admitted they fail to research the finance deals available – and risk undoing all that they achieved by haggling.

Keeping an eye out for genuine 0 per cent interest offers may cut costs considerably. Vauxhall, for example, offers four years at no interest on selected models for customers with a 30 per cent minimum deposit. Generally speaking, motorists should proceed with a healthy dose of caution when offered finance by their dealers. These can often more expensive and less flexible. One trick to watch out for is the use of flat interest rates, rather than annual percentage rates (APR). An APR is charged on outstanding debt and therefore reduces as the total debt is being paid off. With a flat rate, however, interest is charged on the original debt, irrespective of what has been repaid and so does not shrink as the debt is being repaid.

Finance options that the dealership will typically offer are hire purchase and personal contract plans. With hire purchase, a deposit of at least 10 per cent is put down, after which the car is paid for, with interest, in monthly instalments over anything from one to five years. The problem with this option is that there is usually an administration fee with the first payment and even a purchase fee with the last. Until the balance is cleared, the car is still owed by the dealership and can therefore be repossessed if payments are not met.

Personal contract plans require a similar deposit and have a monthly payment structure, but there is also an annual mileage limit which the dealer uses to set a guaranteed future value of the car. At the end of the agreed term, motorists can simply return the car, or pay off the remaining value and take ownership of the car, or it can serve as a deposit for a part-exchange on a newer model. However, there is a fee for every mile above the annual mileage estimate and any damage to the car is charged to the motorist.

It may well be that a standard personal loan is cheaper, so compare the overall cost of any deal, rather than focus on monthly repayments. Dipping into the mortgage is another option and will typically be less expensive than taking out an unsecured personal loan. Better still – considering the low level of return on cash – is to dip into savings to fund the new car purchase. But if you can't, then borrowing the cash may be the only option. However, these days, lenders have become very choosy and are more stringent with their lending criteria. Your credit rating is more important than ever: have a high credit score and you will have plenty of options; have a low one then this will be reflected in either being turned down for finance or having to pay a higher rate.

"With loans getting increasingly difficult to secure, in most cases, hire-purchase loans will be the easier form of finance to obtain as they are secured on the value of the vehicle. Buyers with a good credit rating could opt for a personal loan," says Tim Moss, head of loans and debt at Moneysupermarket.com.

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