As with any finance, you must pay attention to the detail of car finance deals before you sign on the dotted line. Otherwise, you could be tied into something that is either very expensive to get out of, ruinous for your credit score and possibly even a drain on your sanity.
It’s important to remember that not all car finance deals are created equal. And not all car finance deals are suited to all buyers. Here are the things to look for when whether car finance is right for you.
What is the monthly payment?
The headline figure, the thing that draws you into paying for your new car on finance will be the amount you pay monthly. There are some very attractive deals around. You could run a new car for as little as £99 a month. That’s fine, as long as your monthly budget has room for £99 in it.
And remember: £99 isn’t all you’re going to pay. You will pay other associated running costs such as insurance, tax, servicing and maintenance plus fuel.
Look at the total cost
Rather than basking in how little the headline figure is (that’s what the finance provider wants), look at the total monthly cost. That’s to say include the deposit, a final payment (if applicable), the interest you’ll pay and any other arrangement charges or similar. You can then divide this by the number of months of the loan and find out a real monthly cost.
Thankfully, when car makers show finance projections on their website, they have to show the total cost plus all the add-ons.
Look at the example
Toyota has a projection for an Aygo x-trend. If you want £99 monthly repayments, you have to pay a £3910 deposit (Toyota gives you a further £500 ‘allowance’). There’s a 0% APR so just to run the car for 48 months, it’ll cost £180.45 month if you factor in the deposit. If you want to buy the car outright, you must put up an additional £4027.50 final payment. The result adds up to £272.71 a month over the four years.
How much is the deposit/mileage limit?
There are two ways to lower your monthly payments: increase the deposit or lower the number of miles you expect to cover. But not everyone has a few grand hanging around to pay a large deposit or the flexibility to reduce the number of miles they do.
Are there any penalties?
All elements of finance are calculated using the car’s worth at the end of the deal. This is because whoever is providing the loan will own the car at the end of the term. Unless of course you do a Personal Contract Purchase and decide to buy the car outright. And even then, the extra you pay will be worked out according to the car’s value at the end of the term.
The number of miles the car has covered has a direct relation to its value. When you take out finance you agree on a set number of miles over the lifetime of the deal. You then pay a penalty for exceeding these. Penalties are usually between 4p and 10p per mile. That might not sound much. But if you exceed the agreed mileage by a few thousand every year, the penalty could end up being hundreds of pounds.
Let’s hope they both look as cheery at the end of the deal
Think about equity in the car
Ideally you want to have what’s known as equity in your car at the end of a finance deal. This is when you give the car back and you’ve paid more in repayments than the car is currently worth. You can then put this extra money towards the deposit on another car. But the lower the headline monthly payment, the less likely it is that you’ll build up equity in the car. And some dealers have set monthly payment rates artificially low to secure a sale. Come the end of the loan, the driver won’t have any money in their existing car to put towards a replacement.
I’ve been writing about cars and motoring for more than 25 years. My career started on a long-departed classic car weekly magazine called AutoClassic. I’ve since pitched up at Autosport, Auto Express, the News of the World, Sunday Times and most recently the Daily Telegraph. When I’m not writing about cars and motoring, I’m probably doing some kind of sport or working in my garden.
