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Jersey Consumer Council

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Car Finance

November 4, 2015 Money Matters No Comments
car-Finance

Car Finance

A new car is the second most expensive purchase many people make, after their home. So, consider your options carefully before signing on the dotted line.

Research from the motor insurance group Esure shows that nearly a third of buyers do not even haggle over the price of a new vehicle, and only one in 10 spends more than an hour researching finance options. (Daily Telegraph, Sep 2009)

Having found your car, sorted your deposit or trade-in and insurance, you must consider how you are going to pay for the car.

Each finance option will offer different benefits and drawbacks, so be careful, it’s vital to know how much you’ll pay back in total so that you can make an informed choice of finance. Depending upon your personal circumstances one option will suit you better than another.

JCC Car Financing Top Tips
  • Research the purchase value of your chosen vehicle (Read our guide to vehicle purchase)
  • Research the sale and trade in value of your existing vehicle
  • Consider the finance options if you need it….
    • Actual Monthly costs
    • Duration of the finance
    • Check total amount payable in finance charges prior to signing a contract
    • What’s the APR
    • Cost of arrangement/documentation fees; when and how you will pay these? Will they be added to the monthly payments or will you pay as a one off?
    • Cost of exit fees and when they would be invoked
    • Who owns the vehicle at the end
    • End vehicle value or how it will be calculated
    • What vehicle insurance requirements are required as part of the loan
    • Negotiate finance terms with at least two providers
Our guide will help you choose the car finance method that’s best for you.
  1. Dealer car finance options
  2. Independent car finance

Please call us for a copy or visit our web site www.jerseyconsumercouncil.org.je

Dealer car finance options

Almost every car dealer will offer you car finance – it’s a source of income for many of them – and the choices available can be confusing.

However, financing your car purchase via the dealer is not necessarily the cheapest option. A credit card, personal loan or other form of borrowing might fit better with your circumstances.

Which? recommend that You ‘bargain hard’ on finance deals.

Dealers may offer several finance options

Best for Typical cost How it works Drawbacks
Hire purchase People who want a simple form of car finance that’s easy to arrange Between 7% and 13% APR You pay an initial deposit, normally at least 10 % of the car’s price. Then you pay the remainder, with interest, in monthly installments. There’s usually an administration fee to pay with the first payment and an ‘option to purchase’ fee with the final one. Hire purchase offers a higher level of consumer protection than an unsecured personal loan You don’t own the car until the end of the contract – so you can’t sell or modify it without the lender’s permission.

You may have to pay a penalty of several months’ interest if you settle the loan early

You have to take out comprehensive insurance to cover damage

0% finance People who can pay a large deposit. None You pay a hefty deposit – 35 to 40% of the car’s price isn’t unusual – and the rest of the money in interest-free monthly instalments

0% deals are often ‘driven’ by the manufacturers to stimulate sales.

Loan terms can be shorter than other forms of finance, so monthly payments may be higher. You’re also unlikely to get a discount on a 0% deal, and this kind of car finance isn’t available on all cars

You have to take out comprehensive insurance to cover damage

Leasing People who want a new car regularly without the hassle of owning it Monthly payments are normally between £100 and £400 a month. You choose your vehicle and how long you want it for. These 2 factors determine your monthly payments. With some schemes, you can opt for the payments to include maintenance and other regular servicing costs.

This is also known as Contract Hire it is useful as it helps budgeting but monthly costs may be subject to GST. Contract Hire is not common in Channel Islands.

You normally pay a few months’ rental in advance. And you have to take out comprehensive insurance to cover damage – which is costly for expensive cars
Personal Contract Plan People who want to keep repayments low and like a new car every two to four years Between 7% and 14% APR You put down a deposit, pay monthly installments as you go along, and leave a lump sum to pay off at the end of the contract.

The amount you defer, which is set by the finance company, is called the minimum guaranteed future value. The lender guarantees that your car will be worth that amount at the end of the contract.

When the contract ends, you have three options:

•         Pay the deferred sum and keep the car

•         Sell the car privately to fund the final payment

•         Hand the car back to the dealer or finance company

If the car is worth more than predicted, you can use the difference as a deposit on a new car. PCPs offer a higher level of consumer protection than an unsecured personal loan.

PCPs usually work out more expensive overall than hire purchase, especially if you decide to pay the final deferred sum to buy the car. And there are a couple of complications. First, you have to estimate your mileage – and you’ll be charged (say, 10p a mile) for each mile above the estimate. Second, if you return the car, it has to be in good condition – any damage will be charged to you.

You may have to pay a penalty of several months’ interest if you settle the loan early

Dealer Finance – Consumer Council Top Tips….

  • Do your sums

The longer the repayment period for any form of finance, the lower the monthly repayments. By adding a couple of years to the term of the loan, the salesperson can succeed in making their deal look much more affordable.

For example, a £10,000 loan at 10 % APR costs £320 a month over three years and £210 over five – but overall the five-year loan will cost an extra £1,078. Make sure that you compare loans over the same duration.

The Wise Consumer..is aware that a longer loan period will cost you more in the end.

  • Look at the long view

Weekly or even daily repayments look affordable, but can disguise an expensive deal. For example, £10.50 a day or £74 a week still means monthly payments of £321.

The Wise Consumer..asks the dealer for the total cost of car finance, including fees, interest and all other charges.

  • Know the real APR

The APR (annual percentage rate) is the only rate that lets you compare one credit deal with another. But make sure you’re comparing deals with the same duration and loan amount.

Dealers often use the flat rate when they talk about finance to make it look cheaper. Unlike the APR, this doesn’t take account of fees or when the interest is paid.

The Wise Consumer..asks the dealer for the APR of the finance. This includes both fees and interest – so you can compare the total cost with other types of finance, such as a personal loan.

  • Don’t be tied down

A dealer may offer a discount on the car only if you take his finance. He’ll still get his profit from you – you’ll just be giving it to him in a different way.

The Wise Consumer..doesn’t rush into signing on the dotted line. Work out whether it’s cheaper to get your car finance elsewhere.

  • Take your time

High-pressure tactics, such as suggesting that the deal is available today only, can be used to convince you to sign up for car finance.

The Wise Consumer..doesn’t allow any salesperson to put pressure on them

Independent car finance

  Best for Typical cost How it works Drawbacks
A Personal Loan People with a clean credit profile 8% APR and above You borrow the amount you need and pay for the car outright. Repayment periods between one and seven years; APRs vary according to the loan company and your credit profile You may have to pay a penalty of several months’ interest if you settle the loan early.
Credit card People with credit and self-discipline. Average 24% APR. If you have a large credit limit, this works like any other purchase. If you hop between introductory offers on different cards, be aware that you may not always get as much credit as you need.

If the car has a fault, the credit card issuer is jointly liable with the dealer for sorting it out. This applies to any purchase between £100 and £30,000.

Not all dealers accept credit cards. And they may charge an extra fee of between 1% and 3%.

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