Making finance work well for you

Providing you shop around and weigh up the options, then choose a responsible lender, you’re unlikely to find yourself pushed into a bad deal - they do, after all, want your repeat business. Nor will they loan you more than you can, in normal circumstances, afford to repay or they could end up losing money.

Why borrow?

For a start, if you take it out of your account, you could lose plenty of interest. You also won’t have it for unexpected emergencies, at which time borrowing money could be more difficult.

Nor would having cash up front give you more bargaining power. When you buy a car in finance, the dealer actually sells the car to the finance company, which, after deducting your deposit, pays the balance to the dealer in a day or so. In addition, dealers usually receive an administration fee from the finance company for the work they do in setting up the account. In short, your local garage will be just as keen to cut a deal, however you choose to pay.

How and where to borrow

Be clear about exactly how much you can afford. Work out your monthly outgoings - miss nothing out - and subtract the total from your monthly income. Leave a small surplus to cover any extras - loan protection insurance and documentation fees, for example.

There’s the period of the loan to decide upon too - usually one, two or three years. Obviously, the longer you take to repay, the more interest you’ll end up having to cover; be clear about what you’re taking on and opt for the shortest repayment period you can manage.

As to your sources of borrowing, credit and storecard companies, insurance companies and banks are obvious candidates. In this case, the easiest source is, however, often the best: your local dealer. They will usually be able to introduce you to several insurance companies, so that you can compare the deals available. And they’ll help you with the paperwork - which these days has been greatly reduced.

Finance - your options

Conditional sale - the traditional means of finance. You pay a deposit, followed by the balance (plus interest) in fixed instalments over a predetermined contract period. As long as your payments are made on time and you keep the vehicle comprehensively insured and in good condition, then you own it at the end of the contractual period.

Hire purchase - here, you ‘hire’ the vehicle for a fixed period. During this time, you repay, by instalments, the total cost of the car, plus interest. At the end of the period, the vehicle remains the property of the finance company unless you pay an extra nominal ‘option to purchase fee’.

Personal loan - of the type usually offered by banks, building societies, credit card organisations and some finance companies; there’s plenty of options, so shop around. Depending on your status, you will have the choice of either a Secured or Unsecured loan. As the name suggests, secured loans require you to offer something (usually your house) as security against the possibility of your defaulting on repayments. This reduction in the lender’s ‘risk’ factor usually makes these a little cheaper.

Credit sales - different from a personal loan in that the money is advanced for a specific purpose only - e.g. the purchase of a vehicle. You enter the Credit Sale agreement with the lender, who then pays the dealer for the car.

You are then the vehicle owner and must pay the lender by equal instalments, including interest. Unlike a Conditional Sale, there is no security for the lender in the vehicle itself.

Any remedy against default is with the customer.

Personal Lease - until recently, a business option only. However, as a result of recent changes in the VAT laws, it has become a private user’s alternative. Here, you never actually own the vehicle, so never worry about depreciation. You would normally make an up-front payment (usually equal to three monthly payments) and then make monthly payments over the remaining period (usually one or two years in total). Afterwards, you simply hand the car back.

Personal contract purchase Finance Schemes - Most of the major franchises now run Personal Contract Purchase (or `PCP`) schemes.

These programmes offers lower monthly repayments by virtue of the simple fact that you’re not actually paying off the full value of the car.

Whichever finance option you decide upon, be clear about the credit charges you’ll be paying; compare APR figures and if free credit (0 per cent finance) is being offered, check that there are no strings attached. Don’t let that persuade you to buy a vehicle you don’t really want. Make finance work to your advantage - and don’t assume that you necessarily need to own the car.

Usage is what matters - and the easiest, most flexible and cheapest way to achieve it is what you’re looking for.