Driving down the loan deals on new wheels

Few people have the sort of spare cash knocking about to avoid borrowing large amounts of money - and as with any type of borrowing, it pays to do your homework.

Think twice about what's on offer at dealers and car supermarkets. The convenience is tempting, but interest rates can be high.

The AA recommends that motorists should get at least three quotes for loans before signing on the dotted line for a car finance package.

The annual percentage rate (APR) on car loans can be determined by any number of factors, depending on the provider. For example, the length of the loan will always influence the APR; while some lenders may charge a few percentage points more, the older the car is.

There are a variety of ways to finance a car; the benefits and drawbacks of each are set out below.

Personal loans: The simplest way to buy - but compare what's on offer and read the small print. Avoid the small ads that promise low-rate, no-fee, immediate decision loans. They are generally more expensive, with APRs often above 13%; they also demand that the loan is secured against your home.

Think before buying "payment protection" as this can add around £45 a month to repayments. There is no oblig ation to take it out. Another thing to beware of is quotes involving "typical rates". You could end up being charged much more, depending on your credit rating.

Deferred purchase: These plans allow you to defer paying for a percentage of the car's price (usually 30%-60%) until the loan expires. Drivers pay interest and capital for the life of the loan, which can range from one to six years, and settle the outstanding balance when it expires.

These plans bring down the monthly cost by, in effect, extending the loan period.

Personal contract: This works in a similar way to deferred car purchase but is usually offered by car dealers instead of traditional lenders. A deposit of at least 10% is paid and repayments are low because a minimum guaranteed future value (MGFV) is taken off the purchase price. The MGFV is what the car is worth when the deal ends, as long as the driver has not exceeded mileage limits.

At the end of the agreed period, the driver can keep the car and pay the MGFV, or take out a new loan. You are less likely to be rejected for a personal contract plan, as the finance is secured on the car, which can be repossessed.

Hire purchase: The borrower pays a deposit of around 10%-15%, makes monthly payments over one to five years and does not own the car until they have made all payments. The finance is secured on the car.

Best buys


These are all based on borrowing £5,000 over three years.

Car loans: The AA offers a fixed rate of 8.8% (£180 per month with payment protection). Includes a free AA inspection worth £99.

The Co-op has a typical rate of 10.2% (£187.22 a month with protection). Extras include discounted inspection, 50% off MOT, money off B&B mini breaks and airport parking.

Personal loans: Northern Rock has the lowest repayments, £172.81 a month (8.1% fixed rate) if you buy by phone.

Lombard Direct offers repayments of £173.73 per month (7% typical APR) online, as does Abbey National, whose 7.1% APR deal is also only available on the internet.

Source: Moneyfacts