New research from the low-rate personal loan provider shows that almost half of those who borrow money to buy a car choose an uncompetitive finance deal that could leave their finances exhausted, and drivers fuming.
Almost one in five (18%) car owners typically used finance from a car dealer to purchase their car - with four in ten (38%) of those claiming it was for reasons of convenience. However, despite many car dealers’ interest rates set well into double figures, one quarter (24%) of borrowers believed that the finance deals offered by car salesmen were the most competitive available. A further six per cent admit to signing up after a salesman convinced them that their finance was the best deal available.
Statistics from Alliance & Leicester show that on average people borrow £9,000 when they buy a new car. Borrowing this amount on a four year hire purchase agreement with Citroën, at their typical rate of 13.2%, will mean paying almost £2,500 in interest - almost £1,400 more than you would do with a personal loan at 5.9%. That would be enough money to load your new car with mod-cons like SatNav, air conditioning or leather seats. It could even cover your fuel bills for a year.
And for the 4% of borrowers who chose to flex their plastic and buy a car using their credit card, which typically charge upwards of 15%, the cost could be much more.
“You don’t have to be a rocket scientist to recognise that choosing finance from a car dealer with an astronomical interest rate could cost the earth. Drivers could be losing out on almost £1,400 just by allowing themselves to be talked into signing on the dotted line by a silver-tongued salesma,” said Claire Alvey, personal loans manager at Alliance & Leicester.
While half (53%) of drivers with previous experience of buying from a dealer say they would consider them for future finance, drivers do seem to seem to believe they could strike a good deal. Only one in six (17%) borrowers say they would be willing to pay over 6% APR. But when it comes to the crunch car dealer interest rates are often more than double the price limit that most borrowers seem to set themselves.
Claire Alvey added: “Its concerning to see that so many people believe they are getting a good deal, and are happy to go back for more pricey finance in the future. This could be because they are not researching what other deals are available, take the salesman’s word at face value, or simply get caught up in the excitement of buying a new car.
“We would always recommend that people look into how they would finance their purchase before shopping for a new motor. Being a cash buyer gives you a huge amount of bargaining power, so in addition to saving nearly £1,400 on your finance, you might even find that you are able to drive a hard bargain and get freebies that you wouldn’t otherwise be able to negotiate.”
The research also showed:
- Almost one third (29%) of car owners in North Scotland typically buy their car with the help of pricey car dealer finance
- Those in East Anglia seem to be most savvy, with only one in ten signing up compared to 18% nationally
- Seven per cent of car owners in the North East would typically use a credit card to buy a car
- Almost one quarter (23%) of borrowers in the Southern region of England admitted to not looking around at all for credit.
- Six in ten borrowers in Northern Scotland are most savvy and look at more than two different lenders
Examples of typical APRs for finance deals from car dealers:
| Point of Sale Finance Deal | Typical APR | Source |
| Citroen | 13.2% | Citroen website |
| SEAT | 13.1% | SEAT website |
| Nissan | 12.9% | Nissan website |
| Vauxhall | 11.7% | Vauxhall website |
| Toyota | 10.7% | Toyota website |
| Ford | 10.7% | Ford website |
| Hyundai | 10.3% | Hyundai website |
| Fiat | 9.9% | Fiat newspaper advert |
| VW | 9.8% | Volkswagen website |
| Renault | 8.2% | Renault website |
Source: Quotes on Company websites and newspaper advert 20/08/06
Other than buying a house, cars are probably the most expensive purchases we make. It's important to get the right advice – both about the car you're intending to buy and how you're going to finance the purchase. Millions of people who regularly opt for car dealer finance could be missing out on a much better deal. This bad habit could see motorists wasting a small fortune during their motoring lifetime.
As well as checking out the various models, mpg and road tests of the various cars you are considering purchasing you should spend some time looking at some of the low-rate personal loans. This should arm you with enough information about interest rates to allow you to judge whether the salesman is offering you a good deal or not.
Think about what else you could get for the £1,400 you might save by taking the cheapest form of loan - you could use that saving to upgrade your motor to a more prestigious model, or get your new car loaded with luxury extras like air conditioning, leather seats and satellite navigation.
What to look for
Halifax research showed that over one in five (21%) of all unsecured personal loans are for new or second hand cars. There is a multitude of deals available to prospective buyers, not least from banks and building societies as well as car dealers themselves. It's important you consider a number of factors before choosing your finance deal.
Top tips when buying a car:
- How much can you afford to pay each month? Lengthening the time you take the loan over can reduce your monthly payments but will increase the total amount you repay.
- Is there a balloon payment at the end of the loan (e.g. do you have to make a much larger payment when the loan period finishes)? If so, will you be able to afford to pay this?
- What other special features does the loan have? For example, some allow you to make no monthly loan repayments for the first three months – ideal if you have to pay for car tax, insurance, roadside recovery, MOT and other motoring costs in the first few months.
- Find out whether the loan you are considering penalises you for making an early repayment and whether there are any arrangement fees that need to be taking into account when working out how much it will cost.
- If you are considering taking out loan protection insurance how much this will cost? When it will actually pay out and what does it pay? This will help you decide whether or not it is worth it.
- Think about the insurance group of the car you are considering buying - some makes and models are considerably cheaper to insure than others - choosing a vehicle in a cheaper insurance group could save you money in the long term on your motoring costs..
- Be wary of buying from a private seller who only uses a mobile phone number or wants to meet you somewhere other than at their house or business.
- Check to see if there is an outstanding hire purchase agreement on the car. Websites such as www.hpicheck.com can help you find out if the car still belongs to a finance house as well as revealing other key details such as if the car has previously been declared an insurance write-off.
- Ask to see the log book and full service history. Contact the garage who serviced the car and check to see if there were any major problems.
- Beware of private sellers who have oil stains on their driveway or other cars for sale outside their house – a private seller with a high turnover may be simply 'shining and selling' second hand cars gained from other sources.
- Check the car's chassis number and VIN number match the registration details.
- Don't be afraid to take the car to a garage or mechanic for them to check it before you buy. Consider getting a check from a reputable motoring organisation such as the AA or RAC.
- Never buy a vehicle without a registration document/ certificate (this is
the V5/V5C document). Make sure the document is genuine – hold it up
to the light to see if there is a DVLA watermark.
Useful links
Best buy loans
Car
insurance
Roadside
Rescue
Road tests
The golden rules of car buying
