Car manufacturers and dealerships are currently offering some great finance deals on new vehicles in a bid to tempt British motorists, with many charging 0% interest on hire purchase plans.
However, these deals often involve hidden catches that could mean you are better off taking out a personal loan instead.
For drivers more interested in a second-hand car, meanwhile, interest-free credit card deal could offer the perfect solution to their borrowing needs. Here, we weigh up the various different options and identify the key points you need to consider when deciding what’s best for you…
Brand new cars tend to lose a lot of value in the first year they are on the road, so it is vital to pay as little as possible for any finance deal taken out to cover a purchase of this kind.
As mentioned above, the good news is that car companies – whose sales have been hit by the lack of spare cash floating around in most British households – are marketing some fantastic offers at the moment.
The ever-popular Ford Focus, for example, is available from just £199 per-month, with a representative annual percentage rate (APR) of 0%. You will, however, need a deposit of £5,650 to benefit from this 36-month hire purchase agreement, which is also only available for the 1.6 Zetec S 3-door model.
Higher-spec versions of the Focus are available on similar plans costing between £216 and £299 a month, while the deposits required range from £5,200 to £7,242.
You can also get a brand new Honda Civic on a two-year hire purchase plan at a monthly cost of £350 and with a representative APR of 0%. Once again, though, you will need to come up with a £4,495 deposit to take advantage of this offer.
And that, of course, is the rub. Few Britons have £5,000 hanging around to put down on a new car at the moment – although you may be able to part-exchange your current vehicle at least help cover this cost.
Anyone thinking about stretching themselves to take advantage of deals of this kind should also remember that failing to keep pace with the repayments could result in losing both the car and any money handed over so far.
Advantages of personal loans
If, on the other hand, you opt for a personal loan instead of a hire-purchase agreement and subsequently run into trouble, at least you still own the car. This means that you still have the option of selling the car to pay down the outstanding loan – or at least part of it – rather than simply having to hand it back.
The lowest five-year loan rate – available exclusively through moneysupermarket.com – is from Platinum Loans at a typical APR of 6.7%. But this is only available to borrowers who own their own homes and borrow at least £10,000 over a five-year period. The interest charged over that time would be £1,740, based on monthly repayments of £195.67. And the total amount repaid would be £11,740.
Other market-leading loan deals include the Sainsbury’s Personal Loan, which is an unsecured loan and has a representative APR of 6.8%. If you borrowed £10,000 over four years, the interest charged would amount to £1,405, with monthly payments of £237.60.
Sainsbury's is also offering a lower representative APR of 6.7%, if you opt for a shorter term of between one and three years.
These deals are restricted to borrowers with unblemished credit files, though. The loans available to those with less-than-perfect credit scores are more likely to charge interest of at least 8%, while borrowers with poor credit scores are looking at double-digit interest charges.
Taking out a loan can also have implications for other financial agreements such as mortgages – with borrowing of this kind making banks less likely to approve your application – which is another reason why hire-purchase agreements can be more attractive to some people.
Anyone considering buying a second-hand vehicle could also choose to take out a personal loan to cover the cost.
However, as the cost of buying a car of this kind is generally so much lower, it may also prove possible to cover it with a 0% credit card. If you have a good credit score, for example, you could apply for the Marks & Spencer Credit Card, which offers new customers 15 months of interest-free shopping that can easily be used to purchase a car.
However, anyone opting for this way of borrowing will need to be disciplined enough not to run up large debts that they cannot pay off within the 0% period. Otherwise, the interest charged could end up costing them more over the long term. The representative APR on the M&S card, for example is 15.9% variable. The advantage of borrowing the money to pay for a car this way is that you will pay no interest at all if you can manage to repay the full amount within the interest-free period.
Remember though that these deals are limited to people with good credit profiles, so you should check the likelihood of your application being approved using the moneysupermarket.com Eligibility Checker tool if you are unsure about your chances. This way you can avoid rejected applications further damaging your rating.
Once you have decided how to finance your purchase, it is also worth remembering that taking the time to do a bit of research can help you to get a second-hand vehicle for much less.
Before visiting a local dealership to look at a car, for example, check online how much similar vehicles are going for elsewhere and – crucially – be prepared to walk away if the price does not come down as much as you want.
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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