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Tips on Car Loans

Sep 9, 2008
There are some ground rules about borrowing which can usefully apply to car loans in just the same way as any other loan. Simply, they boil down to this: avoid borrowing more than you need and aim to repay the loan as quickly as you can.

By putting together as big a deposit as you are able to will reduce the amount you need to borrow. This not only reduces the cost of borrowing the balance but also helps to show the lender that you mean business when it comes to making the purchase. With more of your own money at stake, there should be less risk of your defaulting on the loan and losing the car.

Repayment of the loan over as short a period as possible is a straight forward way of saving yourself money. The shorter the period any amount of a loan is outstanding, the less interest you will pay. Shortening a five-year loan to four years, for example, will considerably reduce the total amount of interest eventually paid - although each of the 48 (instead of 60) monthly repayments will cost more.

These arguments will hold good whatever the source of your loan. With car loans, however, there is an additional source to choose from - the forecourt or car showroom itself. Here you will often find that the company's own finance deals might appear very attractive on the face of it.

Most attractive of all, of course, will be any offer of 0% finance on your car loan. Any such offer is certainly worth investigating. Beware, however, that some such deals offer the zero percent interest rate only for a limited period, after which you might find yourself paying more than the best rate of borrowing from elsewhere.

Take into account, too, that by accepting a promotional 0% loan, you are probably foregoing the ability to negotiate any reduction in the price of the car or other discounts that might be available. This sort of leverage and negotiating strength comes best by presenting yourself as a cash buyer - a status you will have achieved if you already have the finance in place from your bank or other, off-site finance house.

A further consideration when investigating the offers of forecourt financing offers is that these will often quote the price of a loan at a "flat rate" of interest. At first sight, this might appear a more attractive rate than the APR quoted by your bank or finance company. But, in fact, a flat rate could end up costing you significantly more, since it involves paying interest on the whole of the loan for the whole of the borrowing period.

Forecourt car loans, therefore, might present a tempting offer of the convenience of one-stop shopping by arranging the necessary finance at the same place you are buying the car. However, on balance you may want to consider your financial options first. You may be in a stronger bargaining position, and may well end up paying less, if your car loan is already in place before you revisit the showroom to conclude your purchase.
About the Author
Confused.com is one of the UK's biggest and most popular price comparison services. Confused.com helps consumers save money on everything from car loans to mortgages.
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