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Car Loan

What to look out for when borrowing to buy a car

Some car loan providers offer special deals like cheaper insurance or breakdown recovery; but before you buy, add up the benefits. Other products to consider are personal purchase schemes or flexible borrowing products. And ensure that car purchase is tax effective in the first place.

Along with home improvements, buying a car is one of the most popular reasons for getting a loan. There are good reasons for this:

Firstly, there are plenty of car loan special offers. Secondly, cars are expensive; for most consumers buying a new car without a credit deal of some sort is impossible. And finally, the useful life of a car can predictably outrun the period of the car loan, so it's not a giant leap into the unknown in financial terms.

When buying a car on credit, before going for a standard loan, consider whether it's the right product for you. There are two considerations. Firstly, if you are associated with a company, would it make sense in tax terms for the company to buy you the car? If so, leave it to them. Secondly, if you're buying the car, would a part-purchase scheme be better? HSBC among others offers this sort of scheme, which operates like a loan to cover not the cost of the car, but the cost of your use of the car over a shorter term (e.g. 3 years). You won't own the car, but your expenses will be fixed across the term, and you have no further obligation thereafter. Indeed, the real allure is fixed-rate motoring, because many of these schemes can also include servicing, and recovery.

If that's not your bag, then consider a standard car loan. Even so, some companies offer incentives for car buyers, e.g. insurance discounts or breakdown recovery. And don't underestimate the value of flexible borrowing. If you're buying a £5000 car second-hand, and you manage to beat down the vendor to £4500, a flexible car loan will let you hand back the extra £500 and you won't pay interest on it. Across 3 years, the interest of £500 you didn't need anyway is quite substantial!