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What is cheap car finance?

There are a number of options around for cheap car finance. But what are they, and how do you distinguish between them?

There are a number of options around for cheap car finance. But what are they, and how do you distinguish between them?

•    Straightforward loan
This is the financial product that most people are familiar with. You borrow a sum from a financial institution (including the deals at the car show room which are underwritten by a commercial bank) and repay it over a pre-agreed timescale at a particular rate of interest. Shopping around on a specialised motoring website may be a good way to find a cheap deal for a car loan, as you often have access to many different deals at the same time. Some lenders will insist that you have a deposit to put down, others might be prepared to lend you the full amount. As with all financial arrangements, it’s important to take specialist advice if there is anything about the transaction you are unsure about.

•    0% interest free deals
0% deals allow you to spread the cost of buying your car in instalments over a set number of years. On the face of it there is no extra cost in taking this option. However, the person selling the car will usually have included a premium in the purchase price to account for the cost of offering you this deal. If you can afford to pay the purchase price in full at the outset, you may find that you can get a better deal elsewhere.

•    Hire purchase 
Hire purchase agreements usually involve putting down as deposit at the outset of the purchase, and then making payments of interest and capital during the term of the agreement. These deals can be a good method of getting cheap car finance. Technically, with such arrangements you are not the owner of car until the final payment has been made. This is significant because you cannot usually make modifications to the car without the hire purchase company’s consent. Also, unlike a traditional loan agreement, it can be difficult to end these arrangements prematurely without incurring a loss.

For example, with an unsecured loan, if you find halfway through the term that you are struggling with the repayments, you can sell the car and use the proceeds to reduce the outstanding balance. If you are struggling with hire purchase costs, on the other hand, you may not be able to terminate the agreement. Or if you are allowed, you will not have a car or a lump sum at the end of it because the hire purchase company will still own the car. Accordingly, while hire purchase arrangements might be a good method of getting cheap car finance, consider carefully whether you can afford to go down this route.

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Back to September 2009

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