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Loans - Car finance is costly mistake

Loans - Car finance is costly mistake

Category: Loans

Updated: 31/10/2008
First Published: 26/09/2007

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Thousands of cars with shiny new '57 registration plates have started rolling off forecourts this month. However, new research has shown that car buyers are more likely to choose car forecourt finance deals rather than a personal loan - but this could prove to be a costly mistake.

No matter how convincing the salesman may sound, it's very important that you are not fooled. That's because the many different freebies and discounts you may be offered won't make financial sense if you have to pay a higher interest rate. The most sensible option would be to take out a personal loan, because not only can they work out cheaper, you'll be free to sell your new car on without repaying the loan in full.

For an unsecured loan of £10,000 over 5 years for example, a typical rate of around 6% from a high street bank is easily found if you shop around. Compare this to the standard rate car dealership finance of 10% and the difference is remarkable! A typical 6% loan over 5 years will accrue £1555.40 of interest, and compare that to £2621.60 at 10% - you'll save yourself over £1066.20!

When shopping around for your new loan, make sure you use the total repayment figure when comparing deals. This is especially important when opting for providers insurance, because a competitive interest rate can more than be wiped out by expensive payment protection cover. Don't assume that the rate you see is the rate you will receive, because it will all depend on your credit rating.

After you have chosen the loan for you, be realistic about how long you want to pay it off, as virtually all cars, especially new ones go down in value over time. In fact, an old economics professor of mine once calculated that the optimum time to buy a car was when it's 7 years old, as that's the point where the depreciation curve has bottomed out. Mind you, this was about 20 odd years ago!

So before you splash out on your new car, use our personal loan best buys to find the right personal loan and you'll soon be driving your new wheels away, safe in the knowledge you've got a good deal.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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