Beat the car dealer’s finance

Buying a car is horrible – in my opinion anyway.

Any pleasure associated with choosing a make, model and colour is, for me, massively outweighed by concerns about fuel economy, safety and, of course, the price tag of the car itself.

And while you’re worrying about this, you’ll probably also be getting the finance ‘hard sell’ from dealership staff. But don’t feel pressured to sign on the dotted line, as there could be much cheaper options.

Dealership finance

The number of people taking out finance to buy new cars in March was roughly a fifth (21%) higher than the same time in 2013. For used cars, the number was even higher, at 29%, according to figures from the Finance and Leasing Association.

The Society of Motor Manufacturers and Traders (SMMT) thinks improved car sales are down to economic recovery, as “inflation falls and wage levels improve.”

But what of the dealership finance? In some cases it is out-and-out the best option – for example, the deals which offer 0% finance with no strings attached (although this usually requires putting down a hefty deposit). But in other cases, dealership finance will see you paying a lot more than you need to.

Interest charged on dealership finance varies significantly, based on the type of agreement, customers’ circumstances and deposit amount. But according to consumer group, Which? you can expect to pay between 7% and 14% APR (annual percentage rate).

Taking 10.5% as an average, with a dealership loan of £10,000 over four years, you’d pay £2,181 in interest.

And remember, the loan is secured against the vehicle, and so if you fail to keep up with your repayments, the dealer could repossess it.

Personal leasing is another option. It requires a smaller deposit and gives you the option to trade up to a new model every few years – but you never actually own the vehicle, you just lease it from the manufacturer, and subject yourself to annual mileage restrictions.

For example, you can lease a three-door Volkswagen Polo Match Edition 1.2 over three years for a £2,285.94 deposit and 35 monthly payments of £145. With the ‘acceptance fee’ added, this will cost you £7,360.94 – but remember you won’t own the car.

If you do decide to keep the Polo at the end of the three-year term, you’ll have to find a final lump sum of £5,264.10 and pay an ‘option to purchase fee’ of £60 on top. All told, this puts the cost at £12,685.04 – which is around £460 more than the car’s retail cash price.

In this case however, VW has offered to stump up the first £1,000 towards the deposit as part of a special deal. So without this perk, this leasing option would be £1,460.04 more expensive than paying cash – equating to an APR of 7%.

This is just one example remember, and finance agreements can vary massively from one manufacturer to the next, both in price and terms.

Personal loans

So what other finance options are available if you are buying a new or more expensive used car?

Rates on medium-sized loans (£7,500 to £15,000) are at historic lows, and you could now borrow the money you need for as little as 4.3% with Hitachi Personal Finance and choose to pay the loan back over between two and five years. The same 4.3% rate is offered from a lower £7,000 at HSBC (again, up to £15,000) but you will need to already be a customer.

If you opted for a four-year loan of £10,000 and bought a nice new Peugeot 208 Access, you’d only pay £885 in interest. 

Sainsbury’s Bank and Clydesdale Bank are other strong contenders in the personal loan market, both offering representative APRs of 4.4%, also on loans between £7,500 and £15,000 – with repayment terms of between one and three years, and one and five years, respectively.

Credit cards

As the FLA figures show, there’s quite a demand for used cars, which generally cost less than brand new motors. And if you are looking to borrow less than £7,500 there could be a finance option that’s cheaper than both dealership finance and even a personal loan – a 0% purchase credit card.

The Santander 123 Credit Card charges no interest on purchases for 18 months. Provided you clear the balance within that timeframe, you’ll pay no more than the purchase price of the car. Fail to do so and you’ll start being charged at a representative 16.5% APR. There’s an annual fee of £24 on the card.

A fringe benefit is that when you pay on a credit card, even if it’s only a deposit, you get the purchase protection that comes with the Consumer Credit Act and the Consumer Credit Directive.

Basically, anything you spend on a credit card between £100 and £60,260 is protected, should the goods you buy turn out to be faulty, not as described or simply aren’t delivered to you – which could be a very handy back-up in the case of some new wheels.

Current accounts

If you just want a cheap run-around and don’t want to borrow any more than, say, £1,000 to £1,500, you may want to just use a current account with an interest-free overdraft. For example, the Nationwide FlexDirect account offers a 0% overdraft for 12 months. Provided you get back to black within a year, you’ll repay no more than the value of the car.

There’s also the 0% money transfer option. The MBNA Platinum Credit Card for example, offers 30 months at 0% on cash taken from your credit limit and paid straight into your bank account. The fee is 4%.

For loans options, regardless of how much you’re looking to borrow, have a look at my recent article, The cheapest ways to borrow.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.



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