Buying a new car? Get the right type of loan

MOTORING ON: New cars roll off the production line at Nissan

MOTORING ON: New cars roll off the production line at Nissan

First published in Business: Personal Finance by

DESPITE the general economic gloom and the serious debts which continue to face so many families, consumers across Britain are about to go on a spending spree – for a new set of wheels.

According to the Society of Motor Manufacturers and Traders (SMMT), about 330,000 new cars worth a total of £4.5bn will be sold during this month alone.

Paul Everitt, SMMT chief executive, says: ‘‘September is a significant month for the UK motor industry and the wider economy.

‘‘A strong month for new vehicle registrations will help put both on the right track.’’ If dealers hit the target this time, new car sales will be down only fractionally on September last year, when 332,476 new ownerships were registered.

That figure is close to the total for September 2008 – 330,295 – when the crash of Lehman Brothers signalled the global financial crisis.

In September 2007, as Britain’s house price spiral finally peaked, and homeowners possibly felt wealthier than ever before or since, new car registrations reached 400,019.

Although the average spend on a new car tops £14,000, many buyers happily pay a premium or fuel efficiency and improved carbon emissions.

This year’s best sellers – Ford Fiesta (67,000), Vauxhall Corsa (53,000) and Ford Focus (48,600) – reflect demand among drivers to travel short distances as cheaply as possible.

With relatively few buyers having five-figure sums waiting to be splashed out on a gleaming new car, providing the finance for this car-buying splurge has become a major market – both for the leading manufacturers and for banks, which are keen to stump up the money.

However, both Tesco and the AA have recently slashed personal loan rates this week.

The AA rate of 6.4 per cent APR is available to members on £7,500 to £14,950 loans over one to seven years.

Mark Huggins, director of AA financial services, says: “Our research shows that, while more people are expected to change their car over the next few months than for three years, on the whole they expect to spend less.”

Huggins thinks that about 13 per cent of car buyers will use a loan to fund part or all of the cost of a car, slightly up on last year, but considerably less than the 20 per cent who planned to borrow to finance a car in 2009.

Before they apply for a loan, says Neil Munroe, external affairs director at Equifax, the online credit information provider, they must check that their credit status looks as good as possible.

If their credit status is satisfactory, applicants will find the personal loans market is highly competitive, with Tesco cutting rates to 5.7 per cent APR on £7,500 to £215,000 loans. Derbyshire Building Society offers a loan at 5.8 per cent.

Another type of car loan – a personal contract plan – is for drivers who change cars every three or four years.

An estimate of how much the car will be worth at the end of the lending term is deducted from the loan, to reduce monthly repayments.

One example, the M&S Car Buying Plan, offers £2,500 to £25,000 to buy a car, boat, motorbike or caravan.

It enables the consumer to lower monthly repayments by deferring a fixed amount of their loan until the end. Over a 12-month repayment period, they can defer 60 per cent of the total loan; over five years, they defer a maximum of 30 per cent.

When the repayment period ends, the buyer has a choice: either keep the car and pay off the loan with a lump sum, or keep making low monthly repayments until the total sum is repaid. Alternatively, they might sell the car and use the sum raised (hopefully) to repay the rest of the loan.

M&S says the APR on its Car Buying Plan is 6.0 per cent.

Alternatively, some buyers seek their finance on the forecourt.

But Ian Crowder, an AA spokesman, warns that 0 per cent finance deals might not necessarily be as generous as they look.

He says: ‘‘If you are buying a used car, do your sums and research the market first – the 0 per cent has to be paid for somewhere.”

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