Car finance: a terrible way to pay for your new car

Nissan LeafsMore and more new car buyers are turning to dealer finance. This is not a good way to pay for a car!

New figures from the Finance & Leasing Association (FLA) make for grim reading in my view.
65% of car buyers are letting dealerships sell them the credit to buy their vehicles. This is up from 47% two years ago and it includes hire purchase, leasing and dealership loans.
Why the numbers are rising
There are four possible reasons for this massive increase and three of those aren't good for car buyers.
1) Dealers are getting better at selling finance
2) Their deals have got cheaper relative to banks and other lenders
3) Banks have become more picky who they lend to
4) Car buyers are getting desperate.

On point one, I don't think dealers have suddenly got better at selling finance, which is extremely profitable for them and usually gives the salesperson a fat commission at the borrower's expense. I think dealers have been good at selling finance for generations. My father told me a story from his youth about a dealer who would agree to cut the price of the car by thousands when he was asked to, but by the end of the transaction the buyer would pay a lot more than the asking price.

Nothing has changed, then.

On point two, the FLA claims it's the quality of the deals that are prompting the increased take-up of dealer financing, but I doubt car dealers have really got cheaper than lenders. Although there'll be more than the odd desperate dealer around in these hard times, banks and other traditional lenders are charging extremely low rates for personal loans, at around 6% for the customers with the best credit records.

Here are the five loans currently boasting the lowest typical APR

Desperate banks, desperate customers
Clearly, the third of the four reasons is at least part of the picture, though. Banks have less money to offer right now, because they've been lending out money they don't have in massive amounts for far too long.

The fourth reason – car buyers being desperate – is partly linked to the third, but I think many car buyers are also desperate because they have already taken on so much debt in the past few years. Even if lenders hadn't tightened their lending criteria, they'd still find it harder to get deals. These sorts of borrowers might think that their options are limited and therefore gratefully accept whatever credit the dealer sells them.

Tips from dealers and former dealers
I have been researching tips from reputable dealers and former dealers and a few tips are common to all of them:

Don't let the dealer make you focus on the monthly payments, which is a very common way to deceive you into feeling the finance is cheap. Keep the price of the car firmly at the centre of the discussion and, if you're considering dealer finance, keep the total amount that you will pay in charges, repayments and interest at the centre – not the monthly amount.

Car finance through a dealership is extremely profitable for the dealer, which should tell you one thing: it is extremely expensive for most car buyers.

There are lots of traps and sales tricks. The best resource I found was a great video outlining a large number of the ways you can be caught in a disreputable dealer's lures. It's American, but most of the ruses are at work here in the UK too.

Be prepared to walk away if you feel there's too much pressure or if your instincts are warning you.

My own two pence
None of that should surprise most readers. My own tip is that, after many years now of reading thousands of pages of small print as a journalist, landlord, insurance consultant, paralegal and sceptic, I have seen that it is almost always cheaper and less full of booby traps to keep all purchases as simple as possible, and to keep everything separate.

This means that you'll probably be better off negotiating on the price of the vehicle alone with the dealer, and to sell your old car somewhere else, as well as get a straightforward personal loan in order to pay off the dealer up front.

Do you have to borrow and buy now?
Borrowing to buy things that lose value over time is rarely a sensible financial decision. Unless life would genuinely be extremely difficult for you without a car, the only other sensible reason to borrow to buy is if doing so will increase your worth in some other way.

In the case of a car, that means you can justify borrowing if you are sure it will lead to getting a job with a higher income. If you can earn seriously big money by getting a luxurious car rather than a basic one, you could even justify borrowing higher sums.

However, most people should only be looking to buy second hand – and from cash after they've saved up. Borrowing to buy a car for any other reason is not sensible or sound.

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