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Car Loans - The Good, Bad |
Here in the UK we have just reached that twice yearly milestone when the new car number plate format changes to indicate the car's age. It's always been a great business driver for the car sales industry, with customers flocking to drive around with a number plate indicating that they have a brand new vehicle. It's used to happen only once per year, but now it's twice, to give the salesmen a second chance to reel in some new customers. I don't know why my car number plate has to indicate how old the car is - there is nothing else I purchase where I am forced to display a notice showing how old it is. But that's what happens in the UK and the only way to avoid it is to buy a personalised number plate - which just adds to the cost.
Speaking of cost, the new sales cycle is always a good time to revisit the subject of car finance. Most of us know already, but it doesn't harm to remind ourselves, that car forecourts make as much, if not more profit, out the finance deals they arrange, as they do on selling you the car. A car purchase is normally quite a big one, with new car costs in the UK averaging around ?5,000. Very few people have the financial means to hand over that amount of cash, so will either opt for some kind of personal car purchase contract or borrow money using one of the cheap loans available at the dealer or on the high street. Car dealers love it when you take out their loans, because they can make several thousand pounds more profit on the deal. In fact some will actively encourage you to take their finance by offering additional discounts or including some extras. I looked around at some of the larger mid-range car suppliers and found their standard finance rate to be between 8% and 13%. Compare that to the lowest high street loan rates of around 6%. It looks obvious that you should arrange your own car loan, but the story is not quite so simple. A lot of dealer-arranged finance uses the vehicle as security and so can afford to accept more credit-risky customers at lower rates. The high street lenders are unlikely to do that and so many people will just not qualify for those headline-grabbing low loan rates.
The other problem in the car purchase situation is our natural impatience and our vulnerability to sales pressure. Once you see that shiny new car sitting in front of you, the last thing you want to do is walk away and spend a week or more trying to arrange some cheaper finance. But remember, the new cars will still be there next week and wouldn't you rather have a thousand pounds or more in your pocket? It will help you fund all that expensive fuel you'll need as you show off your new toy!
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