Car finance: The basics

Need a new vehicle but don't quite have the necessary funds at the moment? Car loans might have taken much of the popular blame for the credit crunch, but for many of us they are an affordable way to get the wheels we want.

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But it pays to do your homework before you head off down the dealership, because the cost of financing a car can vary dramatically according to the method used.

So we have taken a look at the options open to you - and their advantages and drawbacks of each.

Personal loans
The traditional method of funding a car on credit for many people, personal loans offer the opportunity to borrow up to £25k - although more often between £7.5k and £15k.

This is just the sort of sum that many people need for a small house extension, renovation work or - funnily enough - a new car.

Rates can be quite competitive and you will be doing well if you get a loan with an APR of around 6%, but there are also plenty of lenders who will be happy to charge you interest of 16% or more - so use the price comparison sites and shop around if you decide to take this route.

Personal loans fall into two basic categories, secured and unsecured. Unsecured loans usually have a fixed rate so you know exactly what you will repay each month and are paid back over a relatively short period of time.

Secured loans are only available to property owners and can see you losing your home if you default. They generally have longer loan periods with variable interest rates - which can mean they cost you much more in the long run. Think very carefully before signing up for one of these.

Credit cards
In many cases cheap credit cards can give you a better interest rate than a personal loan, with some offering 0% interest for a year and a half in a bid to secure your custom.

So if you are buying a car for £5k, you could pay back £277 per month over the 18 month interest-free period and you have effectively had a free loan.

Of course this only works if you are disciplined and have enough disposable income to set and meet the "repayments" - but if you don't fit those criteria then perhaps you need to reconsider how much you are spending on a vehicle.

Dealer finance
You can sign up for finance through the car dealership itself. This can sometimes be fantastic value if you are buying a new car - with manufacturers seeking to boost sales by offering 0% finance deals for a manageable period of repayments.

But if you're buying a used car, the chances are you'll be offered a less favourable rate than you could get independently. By all means ask about the finance on offer, but keep your eyes open.

It used to just be companies that leased cars, but individuals have been getting in on the act for many years now too.

The principle of car leasing is that a company buys the car and you lease it for a set period of time, paying a monthly fee. It is possible to lease used cars as well as new ones, with the leasing company usually inspecting the vehicle and offering you a deal.

At the end of your lease period you will usually get the opportunity to buy the vehicle outright at a good price - although many leaseholders prefer to get a new vehicle instead.

It might sound like an expensive way to not own a car, but because lease companies buy cars in bulk for a good price - the cost of driving the car can work out favourably against buying new as an individual.

Again, make sure you compare deals and stay realistic about what you can afford.

What do you reckon? Is car credit too easy to obtain? Comment below...