Car Finance: How It Works

When making a substantial investment — perhaps a house or a car — the majority of people need to take out a mortgage or a loan to help cover costs. This may be a cause of worry; after all what happens if your income changes? Will you be able to keep up the repayments? Do you fully understand all the technical jargon?

When you plan to take out a loan, it is always wise to shop around to get the best deal. Every money lender will vary with regards to the length of time you have to repay and what charges you will incur. Each lender has to tell you what their APR is prior to you signing anything, meaning you can make an informed decision before you commit. The APR — Annual Percentage Rate of charge — does not include all the costs of a loan but it is generally considered as the most important factor. Normally, a higher APR means you will have to pay more, but there are other costs such as legal fees, administration fees and penalties for early repayment which you should also be aware of.

Included in the APR is the interest rate you must pay, the length of the loan, how often you must make repayments and any fees that must be paid with the loan.

Basically, the APR is a measure of how much your loan will cost, including any upfront fees, spread over the time you are borrowing. Money lenders may try to offer a flat rate which will generally be a lower percentage than the APR. However, that doesn’t necessarily mean that you pay less.

If, for example, you take out a ?1,000 loan with an APR of 10% you will pay ?100 of interest and charges over the first year. The following year, you would pay 10% of the original loan minus that which you have paid back in the first year. So if you had paid back ?200, you would pay 10% of ?800 in the second year. Whilst this charge gets lower each year, a flat rate would stay the same. Even though the smaller percentage means you may have to pay back less at the start, by the end you are usually paying considerably more.

Although there can be other charges, APRs are seen as a good benchmark to compare providers, but it is always worth speaking to a lender rather than just taking the typical APR stated in their adverts. Many providers will change their APR depending on your status, taking factors such as your credit record into account.

If you spend time researching car finance companies before you sign for anything, you will be able to drive home in your new car, safe in the knowledge that you got the best deal possible.

Daniel Collins writes on a number of topics on behalf of a digital marketing agency and a variety of clients. As such, this article is to be considered a professional piece with business interests in mind.