Practical tips to help you improve your credit rating and avoid expensive high interest loans
Buying a new car is a big decision. For most people, their car is the second biggest purchase they make in their lives, with the most expensive purchase being their home. However, unlike a home – which can increase in value and can even be considered to be an investment – a car is something that loses value rapidly, even from the moment it is driven away from the showroom. This means that you have to think carefully about how you will finance the purchase.
There are a few ways that you can finance the purchase of a car. Here is a quick look at the most commonly used options.
A personal loan is one of the most common ways of buying a car. If you have a good credit rating then a personal loan is probably the cheapest option since you can get a competitive, fixed interest rate loan spread over several years.
If you opt for this option, make sure that it is not secured against your home, because this means that if you fail to make repayments your home could be at risk.
You are more likely to have your application accepted if you apply to the bank that you hold your current account and credit cards with, but it is worth shopping around and seeing what APRs other lenders have to offer.
Personal loans are a good option for people who do not have a deposit to put towards the purchase of their car, because the amount available can often cover the entire purchase.
Personal contract plans are a car-focused form of hire purchase, but instead of paying for the car outright, you pay the difference between the purchase price of the car and the amount you would get if you resold the car to the dealer at the end of the contract.
With a personal contract plan, you must put down a deposit – usually about ten percent of the value of the car. You pay a relatively low monthly payment plan for the duration of the contract, and the contract will usually last between one and three years.
At the end of the contract, you have the option of either buying the car outright for the resale price or handing it back to the dealer.
A lot of people use personal contract plans on a rotating basis, returning the car and taking out finance on a new car every few years. This means that for a relatively low fee they enjoy driving a brand new car, and don’t have to worry about the stress of maintenance on older cars.
Hire purchase agreements are similar to personal contract plans, but at the end of the contract you own the car. A hire purchase agreement can run for between one and five years. There are fixed interest rates available, so you have the luxury of knowing what your monthly payment will be for the duration of the contract.
With a hire purchase plan you will be required to put down a ten percent deposit. You are essentially leasing the car for the duration of the agreement, and if you do not keep up with the repayments you will have to return the car to the dealer. Once the contract is up, the car is yours to keep.
The Citizen’s Advice Bureau have compiled a list of the important information surrounding Hire Purchase agreements – http://www.adviceguide.org.uk/wales/debt_w/debt_borrowing_money_e/debt_types_of_borrowing_e/hire_purchase_and_conditional_sale.htm
The Sunday Times recently explored some of the alternative forms of finance which are currently available –
Remember that if you don’t keep up repayments on a loan secured on your car, the car will be repossessed, and if you depend on your car for your income, this could send you into a bigger spiral of debt. Make sure that you can afford the repayments, with a buffer in case your personal circumstances change, before you commit to any large, long-term agreement.
When you are working out how much you can afford to pay, remember that in addition to the car finance repayments you will need to cover the tax, insurance, garage or parking space fees, general maintenance and other running costs of the vehicle. Many people overlook the hidden costs of running a car, and that is why they end up in financial difficulties.