There are all sorts of ways you can raise the funds to pay for a car, with some better than others. Here we’ll help you through the maze, but there’s one thing to remember above all else: it’s the final cost that matters. This will depend on:

• How much you borrow
• The monthly payments and any additional payments at the end or start of the deal
• The interest rate you’re paying and the repayment period
• Any penalties you’ll incur if you pay off the loan early

Before you sign anything ask what the total amount repayable will be, then compare this figure when shopping around. It’s this figure that matters ultimately, unless you’re more concerned with how long you have to pay off the debt rather than how much it’ll cost you. By spreading out the loan over a longer period your repayments will be lower, but you’ll pay more for the privilege.

Annual Percentage Rates (APRs)
Lenders charge interest on the money you borrow; it’s known as the Annual Percentage Rate (APR). How much you can borrow, the term available and the APR will all depend upon the equity in your property, the lender’s view of your ability to repay and your personal circumstances, such as any adverse credit.
APRs quoted are usually typical rates, for a guide only; the exact rate offered will be on an individual basis. It’s best to compare APRs of different loans to determine how competitive they are. Unlike an interest rate, an APR gives a bigger picture when shopping for the best deal on a loan.  Lenders are required by law to show a loan’s APR, but they don’t all use the same fees in their calculation, skewing the comparison. So make sure the APRs you’re comparing include similar fees.

Hire purchase

Buy a car from a dealer and they’ll probably offer you finance in the form of a hire purchase agreement. HP works simply; you pay a deposit then repay the rest of the loan in equal monthly instalments over a set period. The loan repayment is usually structured like a mortgage, so initially you’re paying off only the interest. It’s not until later that you start paying off the capital itself.
A dealer can reduce the asking price of a car then increase the repayment rate to compensate, so pin down the total cost at the end of the deal. It’s not until you’ve paid off the debt that the car becomes fully yours, as this is effectively a secured loan with the debt secured on the car; the HP company owns your car until it’s paid for. This may not sound ideal but if problems arise with the vehicle, the HP company may help you resolve them as it’s still their property.
 

Secured loans

If you take out a secured loan you’ll be offering collateral to the lender. So if you don’t make the payments you’ve agreed to, your home (the most common form of collateral) will be at risk. As there’s little risk for the lender (they’ll just take your house if you default), the interest rates can be kept low. That security also means the lender is happy to lend you more money.
If you’re a homeowner it’s easy to get a secured loan. This is especially good news if you’re self-employed or your credit rating isn’t great. However, your home will be assessed so the lender can ascertain that it’s worth what you say it is.
 

Unsecured loans

The most common personal loan and one of the more expensive in terms of interest rates, as there’s no security if you default with the payments. However, if you’re a homeowner and you stop paying what you owe, the lender will take you to court and bailiffs will be sent to seize enough property to pay the debt.
 

Credit card

There aren’t many circumstances in which it’s cost-effective to use a credit card instead of a conventional loan. Interest rates charged by credit card companies are normally prohibitively high as borrowing on a card is supposed to be a short-term debt. For example, a typical credit card has an APR of 18.9%, while conventional loans are readily available with an APR of under 4%.
However, cards are available with an introductory rate of 0% for six months, so if you borrow the money for a short time it could be worth considering the credit card route – if you know you can pay the balance in full after those six months.
 

Bank overdraft

Bank overdrafts tend to charge interest rates far greater than that of a loan. However, you normally pay interest only for the days you’re overdrawn. So if you need additional money for just a few days each month this approach may be an option – you just need to work out how much it’ll cost and if this represents good value in comparison with the alternatives.
When doing your sums consider the interest rate charged by your bank and any annual or monthly fee charged for having an overdraft facility. Always arrange the overdraft with your bank in advance or you’ll probably incur additional charges.
 

Remortgaging

While a mortgage is the cheapest way of borrowing money over a long period, remortgaging to buy a new car may not be the best option. The loan is cheap on the face of it but your repayments are typically spread over many years. So while the repayments are affordable, the eventual cost could be huge.
Alternatively you could take out an offset mortgage. This is an overdraft on your mortgage, and it’s one of the cheapest ways of borrowing money as the interest rates are relatively low. You can usually pay back the loan at the pace you want, but lenders often assume you’re spending the money on your house. If not they need to know as they may be relying on you improving what the loan is secured upon – your home.
 
Richard Dredge
April 2016