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There are different ways to finance a new or new used car. Two of the most popular are car dealer/manufacturer financing and sourcing your own finance provider. But it’s worth understanding the difference between these two options so you can select the best route for you.
Car dealership financing, which can include personal contract purchase (PCP) and hire purchase (HP), often comes with low interest rates, but you’ll usually need to make a down payment. This is the option that comes with the “hard sell”, because dealer selling you the car will usually earn more commission if you take out their finance plan.
Sourcing your own finance, though a broker or even by going direct to a lender, gives you a lump sum to work with and usually the freedom to approach whichever vendor you choose. Additionally, there’s a huge range of lenders out there to choose from, so if your credit record isn’t good enough for the dealer/manufacturer, you may well still find a specialist lender that’s happy to finance your new wheels.
Warning: late repayments can cause you serious money problems. See our debt help guides.
The rate is everything, right? Well, no, but it is pretty crucial. Here are some of the key differences:
People with excellent credit that want to buy a new car and have a down payment ready may prefer dealership finance.
People that want to shop around and have the option of buying from a dealer or a private seller on their own terms.
Who saved more money?
Julian and Charlie have both purchased new cars for £16,000 each. Julian opts for a car loan while Charlie takes on a financing option from the dealership — so who chose the better financing option?
Julian’s car loan comes with a 5% rate for a three-year period and he pays £506 in monthly repayments. At the end of the loan he’ll pay a total of £1,193 in interest.
Charlie, who takes on 0% dealer finance, pays £134.60 each month for the term of his loan. His £4,600 down payment means he’s only borrowing £11,400, resulting in lower ongoing repayments. He has to find £5,550 at the end of the three years, to buy the car outright, however, and he exceeds his mileage limit a little, and has to pay a £300 fee
When the car is paid off, Charlie will have paid less than Julian, but he had to find two lump sums of cash.
Convenience always comes with a price and that extends to the dealer-financed car loan. Before settling for what a dealer can offer, compare outside banks, online lenders and credit unions. In many cases, you’ll find terms that are better than the dealer’s.
No matter what route you choose when car shopping, always put in the time to research so you understand how to get the most out of your options for car loans.
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