Could you get a better deal on your next car loan?

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A new survey has found a shocking level of ignorance among car buyers who take out finance agreements.

According to the RAC, a quarter of drivers who bought a car on finance didn’t understand the finance options they could choose from. And a whopping 72% accepted the first finance product suggested by their car dealer, without shopping around at all.

Worryingly, 30% of those questioned said they felt they had “little or no control over deciding how much deposit to put down, the size of their monthly payments and the scale of their optional final payment”.

One reason for this is that so many cars are bought on Personal Contract Plans, or PCP. This type of loan isn’t so widely available from lenders like banks as it is from car dealers. So it’s tempting to accept in order to secure lower monthly payments.

However, this can have a sting in the tail. The level of interest on dealer finance is sometimes higher than you realise. Representative APR rates of 8%-10% are not uncommon. And of course representative APR means that 51% of people who take out the loan get that rate. The remaining 49% are often given higher rates.

What should you do?

Buying a new car: If you’re buying new, then the dealer finance — usually sold by the car manufacturer — might be the best deal going. One reason for this is that you’re more likely to qualify for a dealer contribution (discount on the list price) if you use dealer finance.

However, I’d still suggest questioning the terms of the loan and making sure you’re comfortable with the monthly payments. And there’s no harm in shopping around for alternatives just to be sure.

Buying a used car: If you’re buying a used car, I’d definitely shop round for a loan to try and find something cheaper than the dealer finance. Remember, car dealers earn big commission payments on finance deals, so they’ll always be keen to sell them to you. Don’t let yourself feel pressured.

The car loan guide on Money Saving Expert is a good place to start looking for regular car loans. At the time of writing it lists personal loans from many well-known lenders, with representative APR rates below 4% if you’re borrowing £5,000 or more (bigger loans usually have lower interest rates).

Of course, these are mostly conventional loans, where you pay a deposit and monthly payments which cover the full loan amount. There’s no final (balloon) payment like there is with a PCP plan, so monthly payments are high. If you want PCP on a used car, your choices may be more restricted and you could end up with a higher interest rate.

For example, the RAC’s new Flexiloan product advertises a representative APR of 8.9% at the time of writing. Many PCP plans available from used car dealers seem to offer similar rates.

However, even if you’ve decided to go with PCP, I’d still suggest shopping around and making sure you understand the finance choices available to you and all the costs. Once you’ve signed up, it’s often difficult to get out of a car finance deal.

A little research beforehand could save you money and reduce the risk of ending up with monthly payments that are difficult to afford.

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