It's a racing start for the new car sales

The new registration plate starts next weekend - and an estimated 400,000 cars will be driving out of forecourts as buyers cash in on plummeting loan rates and the street-cred associated with having the newest car registration.

Leading the surge in car sales are falling prices for new motors - down 6% on average over the past year, according to Alliance & Leicester, and lower financing costs. Personal loan rates are also down by an average of two percentage points over the past five years, to their lowest levels since the mid-60s. This means that financing a new £10,300 mini currently one of the hottest motors on the forecourts, is now at interest rates similar to when the first A-reg cars went on sale in 1963.

In some cases, the APRs on car finance deals are little more than half what they were five years ago. But whilst these rates are there for the taking, an estimated two-thirds of buyers still accept the first offer they get.

Julie Pentin, head of marketing at AA Personal Finance, says: "Falling rates could easily lull car buyers into a false sense of security if they have previously financed a car.

"It is unlikely they would have to pay the same rates as previously but, on a £5,000 loan, the difference between the best and worst 10 rates could still amount to £434 over the life of the loan.

"At a minimum, motorists should try to get three quotes before accepting a motor finance package - for example, one from a dealer, one from a bank and one from an independent provider."

There are a variety of ways to finance a car purchase, including personal loans, deferred car purchase, hire purchase and personal contract plans. The benefits and drawbacks of each are set out below.

Personal loans


The simplest way to buy. Repayments on a £10,000 loan over four years from Northern Rock, currently one of the cheapest lenders in the personal loans market, are £245.16 without payment protection, equal to an APR of 8.5.

Tesco Personal Finance quotes £248 for online applicants and £250.41 for telephone callers, equal to an APR of 9.2 and 9.7 respectively. Lloyds TSB's Loans Direct telephone-selling arm quotes £246.06, an APR of 8.7 but its branches quote £277.70, an APR of 15.9.

Avoid the small ads in the back of the tabloid newspapers that promise low rate, no fee, immediate decision loans; they are all more expensive than the lenders listed above, many with APRs of 13-15; and they also demand that the loan is secured against your home.

Loan companies nearly always quote the "with payment protection" figure first; in the examples above, it will add around £45 per month to the loan, or £2,160 over four years. These plans are expensive and often of dubious value; you are under no obligation to take one out.

Another thing to beware of is companies that sell you a much higher rate than their advertising promises. It is quite common for a potential borrower to be rejected from the best rate after a credit history check and then sold another loan at a much higher APR. Advertising Standards Authority rules now demand that lenders tell you their "typical" rates. For example, Tesco says that its typical rate is 9.6% (0.5% higher than its cheapest rate) and says that 95% of applicants are accepted.



Deferred purchase


These plans are offered by Alliance & Leicester, Direct Line, Halifax, Marks & Spencer, NatWest and the Royal Bank of Scotland. They 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. For example, under Alliance & Leicester's car purchase plan, if you were to borrow £10,000 with a deferred amount of £3,000 (30%), over 48 months, you would make 47 monthly payments of £194.87, then sell the car to make one final payment of £3,194.87, giving a total amount payable of £12,353.76, an APR of 9. Or you can decide not to sell and continue making monthly payments until the loan is paid off.



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, hand back the car and walk away, 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.

Leasing companies say they are particularly suited to cars that have a high resale value and can make a more expensive car cheaper to buy than a car which rapidly depreciates.



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, so it could be repossessed.