Few people have the necessary funds available to buy a new car outright, so will often instead look at one of two options, either leasing the vehicle, or financing the purchase. Whilst arranging finance is in itself not a particularly complicated process, it’s necessary to have a decent understanding of the finer points to make sure you’re getting the best deal. There are various financing options open to you, from credit unions, banks, online, and often the dealership itself. You can click here to see a representative example of dealership financing for a user SEAT.
Many car financing deals either follow the hire-purchase option, where after the final payment has been made the car belongs to you, or personal contract plans, whereby at the end of the repayment term you have the option to buy the car with a final payment, or sell it back to the dealership for a pre-agreed amount (subject to points such as physical condition, mileage of course). If the trade-in value is greater than the final payment due, then you’ll usually be allowed to put that against your next purchase.
The amount that you need to get financed is the value of the car, minus the trade-in amount, so in a very simplistic example:
£20,000 – £2,000 = £18,000 financing required
You’ll then pay it off in monthly instalments over an agreed term.
If you opt for a shorter term length, commonly 24 or 36 months, then you may well find the vehicle you want comes with 0% interest. If you can handle large payments over a short period, then this is a big advantage. But many people prefer not to, or simply can’t afford that, so need to factor the cost of interest into their calculations.
So a car that is priced at £20,000 might, with financing spread over a two-year period, cost something like £24,500.
The amount of interest you need to pay on your deal will vary according to several factors such as:
Your credit rating
Length of the loan (Generally shorter length = lower interest)
Age of the car (Again, generally newer = lower)
Even your geographical location (less of a factor if financing online)
Therefore before you even approach financing it’s vital to get a copy of your credit rating from a company such as Experian and correct any mistakes that may negatively affect your deal. You could find you make significant savings if they have outdated or invalid information about you.
Ultimately, with financing, everything depends on the total amount you can afford to pay for the car, and over what length of time, so know that before walking onto the forecourt.
Lastly, some advantages and disadvantages of the various sources of financing:
Dealerships – This is a fast and convenient way to arrange financing, but you need to do your research thoroughly to ensure you get the best deal. Naturally for the dealership this is a profit-making enterprise, so be prepared to negotiate, and to be upsold extras such as extended warranties and undercoating. And remember that interest payments are usually front-loaded which can be a problem if you plan to pay if off early. Most dealerships offer a range of finance options.
Banks - Finance from a bank is likely to be competitively priced and may also come with insurance free of charge. Plus, they often have specialists on hand who can check you’re getting the best value for money. However, if you want to buy on a weekend or evening and you’re in a hurry then they’re not convenient.
Online - Again, arranging finance online can be competitively priced, and convenient, but you don’t get that personal service – you can’t ask the detailed questions you could at the dealership.