Car Loans

In this context, we always advise careful planning when taking out a loan to purchase a car. Whereas a mortgage against your house could be seen as in an investment in an asset which is likely to appreciate significantly in value over the term of the loan, a car starts to lose value the moment you drive it out of the garage.

Car loans can be wrapped up in attractive sounding leasing packages, three-year options deals, or simply as the ability to borrow when you have been declined everywhere else. The reality is that specific loans for the purchase of a car can be extremely expensive, and can cause an unnecessary extra debt burden.

Before taking out a loan for car purchase, we would always suggest asking yourself:

• If you are looking to upgrade your car: Do I really need a new car? How much longer can I get by with my existing model? If I must upgrade, can I make do with a less expensive model? How much would I be spending if I paid cash? How much nicer a car might I get in five years’ time if I save for it?

• If you are buying a car for the first time: Do I really need a car? Can I get by without one? How much will this car cost me each month? Where is the money coming from to make repayments? Am I going to cut any other spending back to afford this car? How much will this car cost me each year to keep on the road (tax, insurance, breakdown cover, fuel, maintenance, equipment). Would I still be buying a car if I paid cash? Will getting a car increase my earning ability enough to justify its cost?

Car manufacturers can offer very tempting finance packages as part of the deal on a new car purchase. Some of these deals may have interest rates as low as 3% APR. Remember that if they are offering a finance deal this low, they must be making additional charges somewhere else.

Specialist car credit companies – (e.g. Yes Car Credit).

These companies tend to operate in what is known as the “sub-prime” market. They typically pitch themselves at people who have had credit problems in the past, and count can charge exorbitant interest rates – often up to 20% APR and beyond. The temptation of this kind of loan can often be that your interest rate will be lower if you borrow more. This can be very deceptive. A £3000 loan, even at an extremely high 30% APR, will still cost you less than, for example, a £10,000 loan at 20% APR. In the former case, your annual interest payment will be £900 per year, compared to £2000 per year on a £10,000 loan.

“Regular” unsecured or secured loans

Even though car finance companies like Yes car credit may offer you a loan against the value of your car, you may well still find a better deal by applying for a general purpose personal loan. The reason for this is down to the way the different types of banks calculate their risk. Specialist car finance companies work on the basis that if you default on your car loan payments, they will be able to repossess your car, and sell it on through their net work of dealerships.

General-purpose loan issuers see this as a very costly and time-consuming process, and therefore will prefer lending money on the basis that they think you are much less likely to default on your repayments. For this reason, a loan from these providers may actually be cheaper, although this really will depend on your individual credit circumstances.