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Choosing the right car finance  – a basic checklist

Unless you live somewhere that has an exceptionally good public transport network, buying a car is a great investment for yourself and your family. When you have one everything gets a lot easier. You no longer need to wait in the rain for the bus or cycle on icy roads. If you fancy staying longer at a party or one of your kids wants to join a sports club on the other side of town, that´s not a problem.

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The only downside is the cost. Fortunately, by choosing the right finance package you can greatly reduce how much you pay.

Understand what your options are

The car finance market changes, which means you can´t 100% rely on what you already know. You need to update your knowledge by reading up about the different loan types. In the UK, the two main ones are Hire Purchase (HP) and Personal Contract Purchase (PCP), so start by understanding how they work and what the pros and cons are of each of these options.

Learn from the experiences of others

If you have friends or family members who have recently bought a car using finance, and you feel comfortable doing so, ask them which type of deal they used. Often, they will point out potential pitfalls that you are not aware of.

Websites like Money Supermarket and Money Saving Expert are also good sources of information. They both have forums where people ask questions and share their experiences of the various car finance options.

Use car finance calculators to compare typical costs

Once you understand roughly how much you want to borrow, use a car finance calculator to compare the different options. It is quick and easy to do with the added benefit that using these calculators does not negatively impact your credit ranking. The better your score is the easier it is to secure car financing with a low APR.

Use the total price when comparing deals

Many people only worry about how much their monthly payments will be. As a result, they sometimes end up signing up for a deal that costs them much more than necessary in the long term. Looking at the total you will have paid once you have made the final payment will help you to avoid doing this.

Fully understand the value of any extras

When you are offered extras to sweeten the deal, independently check how much they are worth. If you do not actually want that extra don´t factor in that saving when comparing the deals.

Read the small print and look for hidden fees

Even after you have done all of this research you still take the time to read the contract before you sign anything. You want to be sure that it reflects what was discussed. Pay particular attention to the figures, APR, and any additional fees. Once you have signed it, getting out of it is very difficult.

Using all of the above will help you to secure the best car financing deal, which will reduce how much it costs to run your car. But there is another option that is worth considering.

Save by delaying your car purchase

If you can manage to live without a car for another year or 18 months seriously consider doing that.  You can use that time to save a bigger deposit. As this example demonstrates you have the potential to save a huge amount of money:

If you had to pay an interest rate of 11% a year, each £1,000 you put down as a deposit would save you £169.77 if you borrowed for three years and £289.08 if you borrowed for five years.

With that level of savings, living without a car is worth considering. As is running a side hustle for a couple of years and using that income as a deposit. Potentially, you could use any savings you already have to buy an older car and run that while you save up a bigger deposit for the car you really want to own.

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