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The last thing most of us want to think about when buying a new car is how we are going to
pay for it. While we may be distracted by the alloy wheels, integrated satellite navigation
system and the 0-60mph time, the showroom salesman may be leading you gently down the
path towards a wrong finance solution. While we are thinking mph he is thinking APR.
Car finance is just like any other product. If you want the best you have to shop around and
take the time to understand the industry jargon. For example, do you know the
difference between an annualised percentage rate (APR) and an Effective Annual Rate
(EAR)? Or what a ‘balloon’ payment is and whether it is any different from the Guaranteed
Minimum Future Value?
For as long as we have been in love with the motor car there has been a finance industry
helping us to own our dream machines. As more of us coveted horseless travel as the
ultimate 20th century symbol of freedom and affluence, demand for credit increased. In the
1920s the motor car was largely a plaything for the rich, but mass-production techniques
brought it closer to the general populace, and as the car manufacturing industry took off, so
did the car finance industry.
As both industries matured they became more sophisticated. There is a bewildering array of
finance plans now available from finance houses, each with its own bells, whistles and small
print. Car dealerships might not offer you the deal or product most suited to your needs,
because they are usually tied to one or two finance companies. They have to offer those
products regardless of whether they are the best, so it pays to shop around.
The difficulty with car finance is that it is often tricky to compare products on a like-for-like
basis. When it comes to borrowing we are usually told to compare the total cost of credit,
so as to stop us focusing on the monthly repayments. The total cost of credit depends on
the contract length, deposit size, APR and other, possibly hidden, charges