Borrowing cash for that dream car

Unfortunately, buying a new car means coming up with some serious readies, even if you’re sensible and buy a used car. If you’re without savings to dip into, choose your means of finance wisely: it could mean the difference between getting a good deal and paying over the odds for an investment that will immediately depreciate in value.

The means of finance that you should choose depends on the amount that you want to borrow and how long you want to take to repay your debt. Unlike many investments, buying a car always means depreciation in value, without fail. Look at it this way: as well as your investment losing value over the years you’ll also have to pay any interest on top of that loss. This means that paying no interest or at last lowering the amount you’ll pay will minimise your overall loss.

If you’re buying your car from a car dealer, resist their slick sales talk trying to get you into one of their repayment plans, unless they’re offering an interest free option. They will make you an attractive offer by showing how little you could pay every week or every month, but they won’t be so keen to tell you how much you will pay by the end of the loan term.

If you are considering a dealership’s finance plan, Moneysavingexpert.com’s Martin Lewis urges you to look out for the letters APR after their quoted interest rate. Some dealerships use a flat interest rate, which tricks buyers into thinking they have a low interest rate, but actually means that interest is always charged on the original amount borrowed every month, whereas APR interest loans reduce the amount of interest as you pay off the loan.

“Six per cent sounds cheap, but is roughly equivalent to a costly 12 per cent APR,” says Lewis. He advises that you always find out the total amount you’ll repay including all charges.

For the best means of finance, Lewis recommends three methods: a cheap personal loan, which are currently around six per cent APR; using a zero per cent credit card, but only if you can repay the amount quickly; or taking advantage of genuine zero per cent dealership finance plans, if you check the small print for add-ons such as Payment Protection Insurance (PPI).

Of course, cash is always the best option when buying a car, but how can you get your hands on some? You may already have it in the form of an endowment policy, which may be worth more than you think.

If you took out a ‘with-profit’ or ‘whole of life’ endowment policy when you took out your mortgage, it could be worth your while checking out its resale value before its maturity. Everyone fears that endowment policies will fall short, but this isn’t always the case. You could end up with extra cash to buy your car.

While it wouldn’t be wise to cash in your policy just to buy a car, it could make sense if you were already considering ending your endowment policy for other reasons. Perhaps you want to change to a repayment mortgage due to fears that your endowment policy won’t cover the mortgage amount at the end of the term.

As endowments are taken over a fixed term period, they are worth less than their value if you surrender the policy before maturity to the issuing company. However, you could get around 35 per cent more if you resell your policy through aap, the UK’s largest buyer of endowment policies. To find out how much more you could receive from selling your endowment through aap call them on 0800 995 1005.

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