Interest rates have never been lower, but despite the affordability of borrowing money, some lenders still charge extortionate fees. They know that some consumers won’t put in the time and effort to look around, which is why they can get away with it. So while you can take out finance very cheaply to buy that car you’ve been promising yourself, you could also end up paying way over the odds if you don’t do your homework first.

The golden rule – as ever – is to shop around and to haggle hard. It’s only by doing these things that you’ll know you’re getting the best possible deal. To put things into perspective, take a look at the MoneySuperMarket.com loan calculator, which enables you to see exactly how much that loan you’re considering will cost you.

Let’s assume that you want to borrow £8000 to buy a tidy used Ford Fiesta. It’s worth £10,000 and your current transport, an ageing Vauxhall Corsa, is worth £2000 as a trade-in. On the high street you can currently take out a loan with an APR of around 3.5% – yet some car dealers have APRs of more than 10% on their loans.

Put these figures into the loan calculator and you’ll see that if you borrow £8000 over four years (48 months) at an APR of 3.5%, you’ll have to find £178.65 each month. By the end of the term you’ll have paid £575.33 in interest charges, making the total amount payable £8575.33, which is pretty palatable.

However, if you crank up the interest rate to 11% you’ll have to stump up £204.76 each month and you’ll end up paying interest charges of £1828.27, making the total amount repayable a much stiffer £9828.27. The higher interest rate is over three times what you need to pay and as a result you’ll have to fork out more than three times as much in interest charges. Why would you do that if you have a choice? And you do have a choice.

Earlier this year we guided you through your various car finance options  and it’s well worth reading that to see which might suit you best. In that article we explained how APRs work and what the different types of finance are out there. Once you’ve worked out which is the right one for your circumstances you need to pin down the best deal you can.

Getting the best car finance deal

Finance is a key income stream for any dealer and they’re going to do their best to sign you up. But don’t be pressured into anything; look online to see what deals are available before you set foot in a car showroom. That way, if you see the perfect car and you want to do a deal quickly, you already know how good a deal you can get elsewhere.

Unfortunately, a whole range of factors come into play when you try to get the best car finance deal. These include your credit history, the term of the loan, how much you borrow and whether or not you’re a home owner. This latter one is important because if you take out a personal loan secured on your home you can potentially get the lowest possible interest rate as the lender isn’t taking too much of a risk. But default on the payments and you could lose the roof over your head.

Take out a loan or finance deal that’s secured on the car itself and if you’re borrowing the entire amount (or most of it) you could quickly find that you owe more than the car is worth, because of the car’s depreciation. For more on how depreciation works, check out our complete guide.

To protect yourself against this you should take out GAP (Guaranteed Asset Protection) insurance – the lender may insist on this anyway. GAP insurance pays out in the event of the car being a total loss and its value being less than any outstanding loan on it. Invest in it and you’ll need to take into account the cost of the GAP policy.

Pin down the APR

The APR (annual percentage rate) allows you to compare one finance deal with another, but make sure that you’re comparing like with like. Dealers sometimes use the flat rate when they talk about finance to make it look as though you’re getting a better deal than you really are. But this doesn’t take account of fees or when the interest is paid which is why you need to ask the dealer for the APR of the finance. This includes both fees and interest, enabling you to compare the total cost with other types of finance, such as a personal loan.

Brinksmanship

Some dealers will try harder than others to get your custom. If you make it clear that you’re a serious customer but you also are not afraid to negotiate, hopefully they’ll take you seriously. Now is your time to strike, by playing dealers off against each other. Take this as far as you can and you’ll get the best deal, but don’t be afraid to play hard ball if you think you can squeeze the dealer a bit harder.

Don’t be rushed

Dealers love to apply pressure to buyers by suggesting that a deal is available today, but unless you sign up now you’ll lose out. Don’t be taken in – come back tomorrow and the deal will almost certainly be on the table – and if it isn’t at that dealership, it will be somewhere else. Remember, it’s a buyer’s market and you’ve got the upper hand, so don’t allow yourself to be talked into something that isn’t the best possible deal.

Do your sums

The longer the repayment period for any form of finance, the lower the monthly repayments. By adding a couple of years to the term of the loan, the salesperson can succeed in making their deal look much more affordable. For example, a £10,000 loan at 10% APR costs £320 per month over three years and £210 per month over five years, but the five-year loan will end up costing you an extra £1,078.

The golden rule is to not take everything a salesperson tells you at face value. Ask pointed questions, haggle decisively and do your research. Only then will you know that you’re getting the best possible car finance deal. And whatever you do, don’t buy a used car that’s already got finance on it or you could end up losing everything.

Richard Dredge

July 2016