How to cut the cost of car finance

Wed 29 Aug 2007

If you are one of the more than 400,000 people expected to splash out on a new car with ‘57’ plates next month, be sure to steer clear of showroom finance deals that add thousands to your total bill.

But that’s just the tip of the iceberg: With talk of tax cuts for ‘greener’ cars and sizeable penalties on those that don’t make the eco grade, choosing the wrong model could make the costs of a showroom deal pale into insignificance.

So read on about how to navigate your way through the minefield of choosing – and buying - a new car in these confusing times, and we’ll also let you in on how the government might actually be rewarding the worst polluters on our roads.

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Hurdle #1: Showroom finance
Price comparison site uSwitch estimates that 180,000 new cars will be purchased with showroom finance deals next month, wasting £175 million in the process. “Just because they’re offering the best deal around on the car, doesn’t mean they’ll offer the best way to pay for it too,” says uSwitch personal finance expert Mike Naylor.

Naylor puts the average showroom loan rate at 10.76%, but gives special mention to a certain Perry’s Dealership, which charges an eye-watering 12% APR. There’s absolutely no reason to pay such exorbitant fees when banks are offering personal loan at nearly half that rate– both Moneyback Bank and Youpersonalloan.co.uk offer loans at 6.3%.

So how much will that save you in the real world? Let’s say you buy a Renault Clio Campus Sport for £9,995 and cover that with a five year loan from either of the two lenders mentioned above. Your total bill with yourpersonalloan.co.uk comes to £11,934.61, while Moneyback is marginally more expensive at £11,645.40.

But if you blindly accepted financing from your car dealer at a rate of 10.76%, you would have to fork out £12,973.75 –nearly £1,350 more.

“The message couldn’t be simpler – don’t pay more for the finance on your new car than you have to,” says Naylor.

Give car dealers the swerve with a personal loan

Lender	APR	Monthly cost	Total cost
Yourpersonalloan.co.uk	6.30%	£193.91	£11,634.61
Moneyback Bank	6.30%	£194.09	£11,645.40
Average showroom finance rate	10.76%	£216.23	£12,973.75
Perry’s dealership	12.00%	£222.44	£13,346.67

Total cost for a £10,000 loan over five years.
 
Don’t let the dealer convince you to take their loans
Dealers will try and tempt you into taking out a loan with them by adding some sweeteners to the deal, like discounted RAC breakdown cover or a free HPI check. But don’t be fooled: those freebies seldom make up for the higher interest rate you’ll be forced to pay, warns Moneyfacts.
 
Another tempting but expensive offer to avoid is repayment holidays. “If you took a loan of £10k over five years at 6.5% APR and took a three month repayment holiday at the commencement of the loan, you would pay an additional £124.74 in interest charges,” says Moneyfacts personal finance head Samantha Owens.

Give car dealers the swerve with a personal loan

Hurdle #2: Payment protection insurance
Payment protection insurance (PPI) can offer peace of mind that your car loan will be covered if you find yourself unable to meet the monthly payments, but it can be expensive.

The golden rule is to never, ever, simply accept a PPI policy from your lender, as these are outrageously poor value. As the table below shows, it can add more than £3,000 to your total bill.

Opting for an independent PPI provider instead may take a little more effort, but it is well worth it. In fact, it will actually work out cheaper getting an independent PPI policy on your car dealer’s loan than signing up for the cheapest possible loan and accepting their PPI.

One final word of warning: Some unscrupulous lenders will automatically tack PPI onto your loan without you explicitly asking for it (yes NatWest, Northern Rock, MoneyBack Bank and A&L. I’m talking about you).

Considering the FSA seems unwilling to stop them doing so, it’s up to you to be vigilant in ensuring you don’t get conned into buying something you didn’t want.

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Lender	Monthly cost	Cost of PPI	Total cost
Yourpersonalloan.co.uk with independent PPI	£200.21	£378.00	£12,012.61
Average car dealer loan with independent PPI	£223.26	£421.80	£13,395.55
Yourpersonalloan.co.uk with packaged PPI	£233.15	£2,353.85	£13,988.41
Moneyback Bank with packaged PPI	£246.21	£3,127.20	£14,772.60

Total cost for a £10,000 loan over 5 years with PPI

Compare car insurance quotes here

Hurdle #3: Tax (and how to avoid it)
Had your eye on a sleek new sports car? Well think twice. The government is planning ambitious new green tax laws that could make driving anything other than a golf cart extremely pricey.

Some laws are already in place. For example, buy a super efficient tax band ‘A’ car – those with carbon dioxide emissions of less than 100g/km – and you will be exempt from road tax. While it certainly shouldn’t be the sole factor when buying your car, the savings can certainly add up – cars in bottom tax band G will have to pay out £300 a year. Check the by the Vehicle Certification Association for a list of low emission cars.

And on the not-too-distant horizon, the government is looking at slashing VAT from 17.5% to 5% on the least polluting vehicles. As an illustration, that would translate into a massive £1,800 saving on a Toyota’s Prius. So if you’re looking at a green car, it may be worth your while holding off for a little while yet.
And for those living near London, the government is also talking about scrapping the £8 congestion charge for tax band ‘A’ and ‘B’ cars. To make up for that loss in revenue, mayor Ken Livingstone will more than triple the charge on less eco-friendly cars to £25. If your daily travels require you to enter the capital, then opting to purchase a larger car could prove prohibitively expensive.

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Hurdle #4: The environment
If your main concern when buying a new car is its effect on the environment, chances are you’ll base your decision on fuel economy and emission levels. But what about how much energy was consumed in manufacturing the car, and disposing of it when its usefulness comes to an end?

One firm, CNW, conducted a lengthy analysis of every single factor involved in the life cycle of a vehicle in the US – from ‘dust to dust.’ It encompassed employee transport to factories, the support industries necessary to put a vehicle on the road and keep it there, and literally hundreds of non-vehicle support activities.

And what they found was fascinating: Hybrid cars – including the flagship Toyota Prius - actually consume more energy over their lifetime than many of the much maligned larger vehicles – including the Jeep Cherokee!

“If a consumer is concerned about fuel economy because of family budgets or depleting oil supplies, it is perfectly logical to consider buying high-fuel-economy vehicles,” says CNW president Art Spinella.
“But if the concern is the broader issues such as environmental impact of energy usage, some high-mileage vehicles actually cost society more than conventional or even larger models over their lifetime.”

Source: http://www.everyinvestor.co.uk/personal-finance/loans/how-to-cut-the-cost-of-car-finance/e/151-1172