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Taking Out a Loan to Buy a Used Car

By: Scott McBride - Updated: 6 Aug 2010 | comments*Discuss
 
Loan Finance Used Car Borrowing

Unless he has bundles of £20 notes hidden under the floorboards, a used car buyer will need a loan to finance his purchase. There are loads of options for those borrowing money, with high street banks, building societies and internet lenders all competing for business. Most car dealers, whether franchised or independent, will offer some form of finance too.

The trick is to choose the best rate of interest available, as getting it wrong can cost a buyer hundreds or even thousands of pounds by the time he owns the car outright. The loan interest rate can vary depending on the amount being borrowed, how long it will take to repay and who is borrowing the money.

There are numerous lenders offering personal loans, so shop around for the best deals. Treat a loan like other consumer goods and do not be afraid to haggle in order to secure the best deal. Look at the Annual Percentage Rate (APR), as this will dictate the cost of borrowing, and try to find a loan with a low APR.

Shop Around for Best Rate

Never assume that a car dealer is offering the best loan rate. Always take time to compare the terms and conditions on offer with those available from high street banks. Do not neglect online lenders either, as the internet makes it quick and easy to compare hundreds of deals and many of them are far cheaper than the best high street bank deals.

Be particularly careful when buying a car, as most dealerships will quote a flat rate of interest as opposed to an APR, which most banks use. This can add thousands of pounds to the eventual bill because of the way the different loans operate.

With APR, a customer is charged interest only on the outstanding debt, so as the loan is repaid the amount of interest charged is reduced. With flat rate, a customer pays interest on the whole amount borrowed for the entire length of the loan. For example, borrowing £5,000 over five years at 6.9 per cent APR will mean repayments totalling £5,926.22, but at 6.9 per cent flat rate the repayments will total £6,725. In this instance, the flat rate would need to be 3.7 per cent to compete with the APR.

Check Total Amount Repayable

The easiest way to find the best rate is to ask the lender what the total amount repayable will be, including all charges. Ask for examples of repayment plans with and without extras such as payment protection and other insurances, as these can add considerable amount to the cost of borrowing. If a loan is secured against a lender’s property, his home may be under threat if he fails to keep up repayments, so do not be afraid to examine the small print and ask lots of questions. If confused by any jargon, ask the lender to explain it.

Lenders offering easy finance are, in the main, reputable, but may not offer the best interest rates, so try to get credit from a mainstream lender instead. It is rare for car dealership loans to be competitive, unless there is an interest-free promotion, and be wary of deals that offer zero interest for the early part of the loan. Often a high APR kicks in later on and the lender ends up paying more overall.

Finally, if having difficulty repaying a loan, contact the lender as soon as possible. Reputable lenders will be happy to rearrange terms to make repayments more affordable. Remember it is in the lender’s best interests to have the loan repaid in full, one way of the other.

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