Driving the best deal on car finance

If you're thinking of purchasing a car and you have to borrow the money, then pause a while.

You are buying a financial product as well as a car, cautions a spokeswoman for the European Consumer Centre (ECC). "The car is almost secondary. Often, people go into a garage, see the car they want and have to have it. The salesman suggests that he can help with finance, they sign up to the deal and drive away." This may seem like a good idea, it may even be a good deal, but the only way you'll find out is if you shop around.

The ECC dealt with one man who thought he had signed up for a hire-purchase agreement but, in fact, had signed up for a lease. "He never owned the car and he never would. Of course, there was no comeback as he had signed the agreement," the spokeswoman says.

Under a hire-purchase agreement, the consumer is technically renting the goods until the final payment is made. Only then does the ownership pass to him or her. Consumer hire agreements are essentially leasing agreements, where the customer is technically only renting the goods. There may be a cooling-off period that allows you to withdraw from an agreement within 10 days of receiving the contract.

When shopping around for a loan, ask about the number of repayments as well as the rate. A five-year loan might mean 60 or 61 payments. A loan that appears cheaper may not be. In general, the lower the annual percentage rate (APR), the better the deal for the consumer. All credit advertisements must show the APR, which is the total cost of credit.

More than 80 per cent of car purchasers also buy a financial product to pay off the car.

Mr Joe Cunningham, sales and marketing manager with AIB finance and leasing, says customers usually take out three- to five-year loans. Average borrowings are £11,500 (#14,600) for a new car and £8,000 for a used car. AIB offers fixed or variable rate loans with a typical APR of 9.8 per cent.

On the number of repossessions, he says it is not common for people to overstretch themselves financially. "But people should realise that when they buy a new car, the value decreases substantially as soon as they drive away. They should make sure the car is at least worth the amount they are borrowing."

Mr David Matthews, business unit manager with the League of Credit Unions, says customers' car loans are usually for a five-year period or less, with an average of £5,000 being borrowed. Each credit union sets its own terms and conditions, subject to a maximum interest rate of 1 per cent per month. Rates can be as low as 7.5 per cent, in some workplace credit unions, while community credit unions are in the range of 10.5 to 11 per cent, he says.

Advantages of taking a loan with a credit union include the flexibility of payments, with weekly payments very popular, Mr Matthews says. Credit unions do not repossess cars.

"The big catch with many low-interest finance deals is that there are huge penalties if you miss a payment. We don't operate these penalties," says Mr Matthews.

Mr Eoin Lynam, of GE Capital Woodchester, a leading provider of forecourt finance, says customers can walk into a garage, give their details and, in 75 per cent of cases, they can be approved (or declined) for a loan within 30 minutes.

Up to 90 per cent of Woodchester's car finance business is hire purchase, with lease arrangements accounting for the remaining 10 per cent. With hire purchase, interest rates are in the region of 9 per cent, says Mr Lynam. Repayments can be structured so that they are low but customers then pay a balloon payment at the end.

With a lease arrangement the customer is not financing the full cost of the vehicle but he or she does not own it at the end of the arrangement, which is usually for a three- to five-year period.

The proportion of cars being repossessed has not risen, he says. "If there's an issue with a loan, it doesn't mean we have to repossess. Loans can be rescheduled," says Mr Lynam.

The ECC says consumers should be aware that the garage selling the product is earning a commission and has an interest in the sale of the financial product as well as the car. Any garage selling these products must be registered with the Office of the Director of Consumer Affairs as a credit intermediary. They should have documentation to prove this.

They are also obliged to provide the consumer with a written quotation detailing the nature of the finance, the amount, number and frequency of payments and, where applicable, the APR. This should also clearly state who has ownership of the goods during the agreement.

"The purchase of a car is likely to be the second-most expensive thing you will buy, with your house being the most expensive. If you want to buy a house you have to jump through certain hoops, getting an architect or surveyor to look it over," says the spokeswoman.

If you're buying a used car, get an independent mechanic to check it out.

If you are buying a car, you will also have to pay tax and insurance. Running costs, including petrol and servicing, will have to be included in your budget as well as loan repayments. So, sit down and do your sums.