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Loans and Finance Contracts: 'The Small Print'

By: Tracy Wilkinson - Updated: 7 Dec 2010 | comments*Discuss
 
Loans And Finance Contracts: 'the Small Print'

When taking out a Finance Deal or a Car Loan, the first thing that you need to do is to take the time to read all the small print contained in the contract, even if it is a laborious task. It’s boring, and sometimes confusing but once you’ve signed for it there is only a small window of opportunity for you to spot errors and bring them to the attention of the finance company.

Vehicle Criteria

Check if any stipulations are detailed concerning the type of vehicle that you are intending to buy. In some cases, finance will only be offered if a car is under a certain age (e.g. 10 years) by the time the finance term will come to an end. If the car is coming towards that age when you start the agreement then you will have to agree to a shorter term if you still want to buy the car.

Most financial companies will only offer the amount that the car is worth, list price. For example, if you wish to buy a car that costs £10,000, then that is the highest amount you can borrow - you can't borrow £11,000 and add the extra £1000 onto the loan.

Dealers own Finance Deals or Bank Loan?

Most car dealerships will offer personal car finance deals to people who are buying cars from them. The deals often look like a really tempting proposition, with 0% interest, no repayments for the first 12 months, and various other bells and whistles - however on average it is estimated that motorists will waste an average of over £1000 by getting a bad deal from a dealership. Often these deals will have large APR's, which can push the price right up.

If you are finding it difficult to get a decent interest rate on a car finance deal, have a word with your bank and see how much it would cost you to take out a bank loan and pay upfront for the car instead - depending on your credit score and the amount you are wanting to buy, quite often this can work out to be a better deal. It can even give you a lower monthly payment to make, although if you can afford to raise your monthly payments a little and reduce the term of your loan, then you can secure a better rate of interest and really reduce the extra overheads that you’ll need to pay for buying a car on credit. Depending on your circumstances, you can take out a secure or unsecured loan and even this can affect the price of your monthly repayments.

What Happens if I Don’t Make the Repayments?

With a finance deal, you’ll usually find that the finance company will come and take the car away if you don’t keep up your repayments. They’ll then sell it on to recoup as much as they can and your credit rating will be left in tatters. Some policies will allow you to hand the car back to the finance company as long as you have paid over a certain amount for it (usually around 2/3 of the total loan price), or you have gone more than half way past the loan term (e.g. year 3 of 4). This can be a way to avoid legal action, but you will lose the money you have already spent on the car when you hand it over.

Loans usually work differently: if you have taken the funds in the form of an unsecured loan, then the financial institution will chase you for payment and will probably instigate legal proceedings to recoup as much of the money as possible, potentially forcing you into bankruptcy if you cannot pay.

With a secured loan you must be really, really careful.If you take out this type of loan it will usually be secured against your property or other large asset. If you default on the repayments this could lead to you losing your home (or other asset that the loan is secured against), so please make sure before you do this that you are 100% sure that you can keep up the repayments.

Finally, before you sign the document, check all the figures in the contract including:

  • the agreed Interest Rate
  • the agreed Purchase Price
  • the loan term
  • any admin charges
  • dates that the contract will start and end
  • date that the monthly payment will be taken
  • the amount of any deposit that you are paying
  • any agreed extras are included in the overall price
If there are any errors in the documentation, don't sign it, and bring these details to the attention of the financier. Ask for new documentation complete with the corrected information.

Whichever option you decide to go for, it is imperative that you check any finance contract or loan agreement for all the conditions and terms that will apply to you if you sign the document. It can be boring to wade through all the information on there but once you've signed it will be a legally binding document - so if you don't take the time to check it thoroughly, you might regret it.

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