Bank Loan or Finance Offered by the Dealer?

Almost 2.5 million cars were bought in the UK in 2007, and of these, a huge percentage were purchased by using dealer offered car finance. Even though car sales have been in rapid decline since the onset of the credit crunch, the motorists that are still buying cars are bursting their budgets and wasting money on expensive finance deals offered by the car dealer or reseller that they purchase their vehicle from.

Is it always a bad idea to accept dealer finance?There are some good finance deals out there but generally, you can expect to pay a much higher APR if you take out a finance arrangement offered by the dealer as compared to the sort of interest that you can expect to pay if you take out a bank loan.

Of course, any loan you take out will have an interest rate which will be set against your personal circumstances, however, if you look at the following example it will give you an idea of the kind of prices you are looking at:

For a car costing around £18,000 if you pay a 10% deposit and then take out a dealer finance arrangement, you can expect to pay an APR of around 11.4% - costing just under £3,000 in interest over a three year loan period.

If you were to take out a personal loan with a competitive rate then you can expect to get an APR of 7-8%, which would mean your interest would be around £2,000 - which is a massive saving of £1,000 over the loan period.

So am I Better off Getting a Bank Loan?

It really depends on your personal circumstances, but unless the dealers have some really good deals on then the answer is probably ‘Yes’.

If you are thinking of getting a loan you should shop around as there are lots of lenders and loans on the market, and you can save a fortune by choosing the right one. Before you go ahead and make an application, you’ll need to know a little more about the type of loan that you are thinking of taking out. There are two main options – Secured Loans and Unsecured Loans.

Secured Loan

If you are a homeowner then you might be eligible to borrow money in the form of a secured loan. This is also sometimes a better option for people who don't have a great credit rating - but do have a property in their name, but again, this will depend on your individual circumstances. The lender will use your property or other assets as collateral against any risk that you represent to them. You must remember that if you take out a secured loan and you cannot keep up the repayments then it is likely that you will lose your home.

Unsecured Loans

Unsecured loans are very popular and there are loads available on the market. A good option if you are not a homeowner as the lender does not secure the loan against any of your assets. Because of this they are far less likely to lend to anyone they consider to be a risk, so if you've not got a good credit history it is unlikely you'll qualify for this type of loan. Because the risk is higher, you'll usually have to borrow less than you could if you were taking out a secured loan, or the loan term may be shorter.

Remember that although property is not secured against your loan, you will be taken to court if you don't make your regular payments as agreed.

If you are thinking of buying a car through credit there are a couple of ‘golden rules’ that you should make sure you follow to get the best deal:

• Shop around – visit loan comparison websites and banking websites to get the best deals
• Never accept the first deal that you are offered
• Don't be afraid to haggle – what’s the worst that can happen?
• Do some research – see if you can pay a little more per month and get a lower interest rate or a shorter loan term – either way you'll save money.