For most people, choosing a car is a slow, well-thought-out process - and choosing a car loan should be much the same. However, many people simply go with whatever finance deal they are offered at the showroom, even though there may be much better car loans on the market. By planning well and choosing the right loan, you can save yourself a lot of money in the long run.
Here are some tips for choosing the right car loan.
Make a plan
Plan how much you want to borrow, and for how long. Don't be tempted to get a bigger loan for a more expensive vehicle unless you're sure you can afford it.
Plan your loan in terms of monthly payments. You need to be sure that your payments are affordable and that you will still be able to afford them if your other costs of living rise. If your loan payments are going to leave you with very little disposable income, you should probably play it safe and find a cheaper alternative.
Shop around for the best loan.
Taking your time and looking at what's available in the market could well find you a deal with a lower interest rate, which can save you a lot of money. The interest rate you are offered will vary depending on your credit rating, but anyone can save money by taking their time and finding the best deal.
Check the total repayment figure
The interest rate of your loan and the length of the repayment term will both affect how much you pay in the long run. If you can't find a lower interest rate, is there any way you could repay the loan more quickly? It might be worth making a few short-term sacrifices if it saves you hundreds of pounds in interest.
Once you've done the calculations, take a good look at that overall figure. If that £2,000 car is going to cost you £3,000, do you really need it that much? Would it make more sense to save £2,000 - and then buy a similar car for £2,000?
It's impossible to predict what could happen in the next few years - even if you're sure your loan payments are affordable, redundancy or a personal injury could seriously damage your ability to keep up with repayments.
So it often makes sense to consider Payment Protection Insurance (PPI) on your car loan. If at any point you find yourself unable to make payments due to circumstances outside your control, your car loan payments could be made by the insurance company for a pre-agreed period of time.
You could also look into gap insurance, which could - should you have an accident - cover the shortfall between the market value you receive from your (standard) motor insurance claim and the greater amount due under your loan agreement.
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