Four Tips For Financing Your New Car
Whilst buying a car is without doubt an exciting time, it can also be stressful and costly. Most people (at least 80%) cannot afford to buy a new car outright. Therefore, most car buyers acquire a new car using a deposit as down payment and obtain car finance to fund the rest. The following five tips are valuable for people considering obtaining a new car as they give different options on how to best to fund the transaction.
1. Sell your current car privately instead of a part exchange – Whilst it is much more convenient to ‘trade in’ an existing vehicle as a part exchange on a new vehicle this will not maximise the money you get for your car. Done primarily for ease and convenience (if you put your car in as part exchange against a newer model you remove the whole selling process, advertising costs, people calling around your home to view the car and being annoyed by phone calls for weeks after the car has been sold), it is a known fact that a part exchange is the least profitable way to sell your car. Therefore, if you have the time and patience, it is advised that you opt for a private sale. Perhaps the best way to determine whether you should part exchange or sell is to determine the market value for your vehicle and compare this with some part exchange values. Whatever the difference between the two can be considered your payment for the hassle of private sale and therefore you can make an informed decision.
2. Car Finance From A Dealership – This is the most popular way to finance a car. Dealers provide approximately 65% of all car finance. The reason for this is that people shop for cars based on the price of the car and because 80% of all new car buyers need finance they end up taking finance from the same dealer that provides the best price on the car.
Dealers typically offer hire purchase or car leasing. Hire purchase is an arrangement where people sign a contract to make monthly payments across 3 – 5 years and they end up owning the car at the end of that payment period. Leasing is slightly different because it is often much, much cheaper you can have the option to buy the car at the end of the period or simply return it to the dealer. However, you must be careful with dealer finance (or any car finance for that matter) and you should always shop around and compare the monthly deal that you have been offered. Just because you negotiated a good price on the car doesn’t always mean that you are getting a good monthly price on the finance. In some cases the monthly payment could have a premium hidden in it with a high APR and therefore the calculation of your monthly payment may not relate to the ‘good price’ that you think you negotiated on your car. Therefore, shop around and compare the monthly payment, the total payment ensuring that you are comparing the same contract period etc with different dealers and finance providers irrespective of the price that you have negotiated on the car.
3. Car loans from a bank – Personal car loans account for only 13% of all new car finance. This is surprising because other than using cash, this is the only form of finance that enables the borrower to own the car from the point of purchase. Therefore, whilst most people think they own the car that they are driving, if they bought the car with finance and are still making monthly payments, then approximately 87% of all new cars are not actually owned by the drivers.
If you are thinking of purchasing a car using a car loan of some form you should always shop around based on APR. There are various comparison websites that enable you to compare car loans but you should always be careful about two things:
(i) the Apr that the website quotes to you is unlikely to be the one that you get. This is most likely the best APR you could get and it is often adjusted to meet how much of a ‘risk’ that bank may think you are;
(ii) do not submit too many applications for finance. If you submit three or four applications to different banks and you are refused by all of them, you might damage your credit record and make it difficult for you to obtain finance in the future. Some finance websites enable you to apply for a loan and they can advise you whether or not you are likely to succeed and this can be a safer way to apply
4. Lease your new car – As discussed above, car leasing is most often the cheapest way to finance your new car. In fact, according to the Finance & Leasing Association, in the first 6 months of this year it was the most popular form or finance provided by dealers. When making a decision on car finance, be sure that you actually need to own your next car? If so, then the only form of finance that permits this immediately is a personal loan from a bank – remember, with hire purchase you will not own the car. If ownership is not so important, then leasing is a cheap form of finance – but you must have a good credit rating. There are many benefits with car leasing as it allows you to receive a new car every few years (although this can change, depending on the lease agreement) without the hassle of a part exchange. However, make sure that you are familiar with the disadvantages (you need to agree an annual mileage limit) and as always be sure to shop around and compare like with like on all alternative car leasing deals.