Cut the cost of financing your new car
With the new 58 registration cars rolling off the forecourts this week, choosing the wrong personal loan could be an accident waiting to happen.
According to research by financial data provider Moneyfacts, the difference between choosing the best and worst personal loan of £5,000 could set you back £697, while the wrong choice of a £10,000 loan could see you more than £1,141 out of pocket.
Around 93% of car loans are priced at a typical APR – which means the rate that you see may not be the rate you get.
Getting the right loan
Andrew Hagger, a spokesperson for Moneynet, urges caution when it comes to shopping around for a personal loan. “Depending on the condition of your credit profile, you could end up paying a far higher interest rate than the one advertised,” says Hagger. “I would urge all new car buyers to shop around for a personal loan, but do take care when it comes to typical APR pricing.”
Hagger also advises drivers against taking out payment protection insurance (PPI), as not only could this roll up into your loan repayments, but it can be difficult to claim on.
“If you do decide to protect your loan repayments with PPI, don’t buy it from your lender. Check out independent providers for the same cover at a fraction of the cost – and remember to read the small print,” he says. />
You should also be realistic about the term of the loan you choose. Repayments will be lower if you opt for a longer term, but you will pay less interest in total with higher repayments and a shorter term.
Take the example of a £10,000 loan from Sainsbury’s bank, which has a typical rate of 7.7% APR. Over seven years repayments would be £155.24 per month but if you reduce the term to five years, although the monthly payments would be £45.08 more expensive, you’d save yourself a hefty £1,021 over the term of the deal.
“Paying for a new car with a personal loan also means that you will own the car from day one, but if you default on the loan repayments make no mistake - the lender will seek payment of the outstanding balance,” warns Hagger. “Depending on the amount this could result in being visited by a bailiff or being hauled up in court and being handed a county court judgement.”
Hagger also explains that most loans will come with a redemption penalty too, so if you plan to pay off the loan early you will have to pay additional interest on top. “How much you pay will vary from provider to provider, but it is typically between one and two months’ extra interest,” he says.
If you’re planning on buying a new car this season, be prepared to enter a battle of wills, says Mark Boyle, a personal loans manager at Alliance & Leicester.
“Car dealers, understandably, want to sell at the highest possible price, and motorists need to make sure they do not pay over the odds. It’s wise to do your research before you head to the showroom, and be prepared to haggle when you are there.”
Car loan round-up
How they compare:
|£5,000 over three years (without insurance)|
|Difference over term = £697.68|
|Source: Moneyfacts 28/08/08|
|£10,000 over five years (without insurance)|
|Difference over term = £1,141.80
Source: Moneyfacts 28/08/08
If you want to escape from a special mortgage deal within a specified timeframe, which often extends beyond the deal ending, the lender will levy redemption penalties. The early redemption penalty might be several months’ interest or a percentage of your loan. Either way, it could cost you several thousand pounds and is the mortgage lender’s way of making you stay put after the initial low interest rate period has ended paying an above-average rate.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.