Looking for the right car? Make sure you get the right loan!

Car loans, like the vehicles they finance, come in a variety of models and in all shapes and sizes. Take the car finance deals available from car showrooms as an example. Terms vary greatly but the average APR is 13.3%, which is staggeringly racy considering you can get personal loans at around 5.8% from the likes of Cahoot and the Post Office, and 6.5% from Sainsbury's Bank. Yet 17% of car buyers, that is 5.5 million people, looking for car finance still take out a loan with the car showroom finance company!

A personal unsecured loan is much cheaper than the finance deals available in car showrooms but to get the best deal you have to shop around. Alliance & Leicester (A&L) calculates that a £12,000 loan from a showroom over four years would cost £1,700 more than its own personal loan priced at 6.4%. Using its rate as a benchmark, over a lifetime the average person buys 11 cars, which would cost them an additional £18,791 if they used car showroom finance, said A&L.

According to its research, only 40% of those looking for finance bother to shop around. Shame - because with competition rife there are so many good deals to be had - all you have to do is spend a few minutes at an online loan comparison service. Of the 17% that use dealer finance, half of these believe that it is the quickest and easiest method. Some even think dealers offer the most competitive rates or believe that they will get a discount on the price of the car or another type of freebie.

Before you fall into the hands of pushy salesmen, what you should do is organise your loan and have the money ready in your bank account so you can write a cheque. Only then should you visit the showroom. With many loans you can apply online but you still have to physically sign the documents so the whole thing shouldn't take more than a week.

Some lenders, such as Northern Rock and Abbey are able to process the loan and pay on the same day. But there are charges for this. Northern Rock charges £45 for same day delivery through its express service, while the AA's 24-hour service costs £45 for its 24-hour courier service.

Understand how much you can afford to pay

But before you start applying for loans, you need to set a budget and, more importantly, estimate how much you can afford to pay each month. When working out how much you can afford you should include car insurance, tax and, of course, the rising price of petrol. Sainsburys Bank estimated that on average it costs £2,053 a year to run a car a year, excluding loans. You can use online personal loan calculators to work out how much you will be paying each month. Rather than the APR, the most important figures to look at are the actual pounds and pence monthly repayment fee and the total cost of the loan.

Personal loans can be over one to 15 years but it is usually better to have them over a shorter period of time because over the longer term your circumstances may change and are you realistically likely to be driving the same car in 15 years time? They are also unsecured and the lender can ask for the full amount to be repaid should you fail to keep to your end of the bargain.

Watch out for charges as well. If your bank account is under-funded and you can't pay your direct debit, you could face a charge. Some lenders charge a fee if you pay by credit card as well. If you think you need payment protection beware - it can be pricey. Citizens Advice has just complained to the Office of Fair Trading about the cost so you should question whether you really need it.

Often it can be worthwhile going to one of your exiting financial providers. They may even offer a special rate. If you get turned down by one lender, it is advisable not to apply for multiple loans at the same time because this alerts lenders and they may think you have a debt problem and it could affect your credit rating. If you have enough credit, you could buy a car with a 0% credit card. Even if you have to pay a 2% balance transfer fee, you would still be better off.

Personal unsecured loans are arrranged on a fixed interest rate basis over the term of the laon, which has the advantage that you always know what you are paying. Sometimes there might be an arrangement fee as well. On the whole, if you want to pay this sort of personal loan early there are redemption charges. So if you think you may be able to pay if off early, you need to look for a loan with no redemption charges.

07 October 2005 © Moneyextra.com

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