When working out the best way to pay for a used car, check out the different types of loans to find the best deal. You will find time spent doing your homework will pay off. Don’t dismiss credit cards, as sometimes they can save you money, but be careful not to run up hefty interest charges if you find you can’t pay off the loan in time.
1) Do your homework
Which is the best option? A personal loan (secured or unsecured), hire purchase or personal contract purchase (PCP)? What’s on offer? Search the internet, go to local dealers, talk to your bank and compare the most competitive deals.
– Unsecured loan –loan period and monthly payments are fixed. You own the car from the start and can sell it whenever you like, but repayments continue till the end of the repayment period. Most unsecured loans can’t be repaid early without penalty.
– Secured loan – secured against assets like your home. You can borrow more over longer and monthly repayments are lower than for unsecured loans. If you default, the asset used to secure the loan can be repossessed.
– Personal Contract Purchase (PCP) –a deposit is paid to lease the car for a fixed period. You pay a final (balloon) payment calculated at the start of the agreement based on the future value of the car to keep the car, or you hand the car back. PCP payments are lower than hire purchase payments but you can’t sell the car until you make the final balloon payment.
– Hire purchase (HP) –pay by fixed monthly payments over a fixed period. The bigger the deposit paid, the lower the monthly repayments. You don’t own the car until the final payment, so to sell it, you first have to settle the finance.
2) Check out the internet
Online lenders usually lend at more competitive rates than banks who charge a higher APR (Annual Percentage Rate) for used cars loans. Online lenders usually offer rates for used cars that are almost the same as for new cars. Be sure you have a credit rating score over 680 to qualify for the lowest APR.
3) Take advantage of interest-free deals on new credit card.
Buying from a dealer, you can usually pay with a credit card. Typically this is not worthwhile unless you can take advantage of deals that credit card companies give to new customers. If you don’t have to pay interest for the first 6 or 12 months and you pay off your car in this period of time, then you could be quids in, saving interest paid on alternative loans.
Don’t be afraid to haggle. When you’ve done your homework on competitive deals you’re in a strong position to bargain. Even if dealer can’t match the offer that you’ve found elsewhere, you know where to get a better deal. It’s worth haggling with them on finance repayments as taking out finance with them can mean getting a bigger discount on the price of the car.
5) Do your sums
Check out the total amount paid at the end of the period. Make sure you’re not paying over the odds in interest. Study the APR on the loan. The lower the rate, the less interest, but check the payback period. A lower APR over a longer period can look attractive, but it might end up costing more.
Watch out for hidden extras. Make sure you understand if there are costs to set up the loan or early payment charges.
1) Pay more interest by using a credit card
Interest-free deals look good, but are you sure you’ll be able to pay off the balance in time, as otherwise you will be paying over the odds on interest.
In general paying with a credit card works out more expensive than getting a bank loan as the APR on cards is much higher than what is charged by the bank.
2) Add the cost of the car to your mortgage
Adding the cost of the car to your house mortgage that’s at a lower interest rate might sound attractive, you might end up paying a lot more in the long run. You’ll almost certainly be still paying for your car long after you’ve sold it!
3) Expect a bank to lend money for a car over 4 years old
Most banks won’t consider lending for a car over four or five years old, so don’t waste your time. Banks charge a higher APR on used cars than new cars too.
Avoid long term loans – 5-6 year terms are too long. Try to pay off the car loan within three years or less without straining your budget.
4) Get carried away
It’s so easy to be tempted and find yourself overspending. Before you start to look for a car, work out your budget and how much you can afford on repayments. What other commitments do you have? Calculate on having total monthly debt payments no more than 33% of your gross monthly income.
5) Risk not being able to keep up with payments
What would happen if you lose your job and can’t keep up repayments? Most lenders offer a Payment Protection Insurance (PPI). Shop around as you can often find better deals if you get this separately.
Most important of all, work out your budget (and stick to it), be realistic about what lenders can provide but don’t be afraid to drive a hard bargain, try to keep the loan as short and low in interest as possible and make sure you pay off in time and buying a used car on credit should not be difficult.
If you are looking to buy a car on credit, visit Northern Motors and covering London and Watford this dealership group are able to offer a range of financing options.
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