Traps to avoid when buying a car on finance
Buying a car through hire purchase (HP) or personal contract purchase (PCP) agreements might suit your budget, but there are some traps you need to watch out for. When securing car finance deals, it’s important not to be lulled into the traps of wily car dealership salesmen, who could trick you into spending more than you want to. Equally, once you’ve entered a car finance deal, there are a couple of things you need to remember that will protect your interests.
In This Guide:
When shopping for a new vehicle...
Shop for finance first
If you’ve started shopping around for a car, you’re likely thinking about how much you can afford to pay per month. But a monthly payment doesn’t buy a car, it buys a lump sum of cash. How much cash you can afford to be loaned depends on how many months you finance, and the interest rate of the loan.
Going into a car showroom with only an idea of a monthly payment can make you a target for high pressure sales techniques. You’re likely to spend more than you intended to and pay a much higher interest rate than you wanted to.
To avoid this trap, compare car finance deals before anything else. It can be useful to get a pre-approved loan from a credit union or bank. Unions aren’t perfect but tend to have lower auto rates than other lenders. Once you have a pre-approved loan, you can shop for a car that suits your budget, and you can compare your loan with other finance offers.
Negotiate your price
If you simply negotiate down from the sticker price of a vehicle, or the “asking price”, this normally sets the bargaining in the dealership’s favour. To set the bargaining in your own favour instead, make an offer based on what a new vehicle cost the dealership, or the “loan value” of a used vehicle. There are plenty of free online resources that can help you to work out these figures.
Remember that each step in the vehicle purchase process is a separate transaction. Crafty salesmen may try to mix these separate transactions to confuse you. Negotiate the cash price of the vehicle, and then negotiate the value of your trade-in separately and subtract it from the cash price of the vehicle.
Things to watch out for after securing car finance
Potential losses and GAP insurance
If you’re involved in an accident or your car is stolen, insurers will only pay out as much as the vehicle is worth at the time, rather than how much you paid for it. Worse still, if you’ve bought the car on hire purchase, your insurer may only pay out a sum that’s a lot less than any remaining money that you have to pay.
It would be wise to take out a type of policy called GAP insurance, also known as car depreciation insurance. This covers the difference between the sum your insurer would pay out, and the amount owed on finance. So, if you owed £8,000 but at the time of an accident or theft, your car’s value had depreciated to £6,000, your GAP insurance would pay the £2,000 difference. This would mean that you could pay the finance off, instead of continuing to pay for a car that you can no longer use.
Loss in car value
Even if your car isn’t written off in an accident, it can still lose more value than would otherwise have been the case. More desirable vehicles, like motorbikes and classic cars, are even more likely to depreciate in this way. If an accident wasn’t your fault, you should be able to claim against the other person for loss of value, as well as for repairs. To do this successfully, you will need:
- An independent engineer’s report of your vehicle following repairs
- Confirmation that all repairs were carried out by an authorised repairer
- If the vehicle has been sold at a loss in value, evidence of this should be provided.
When the police think that a driver has committed an offence, they send a Notice of Intended Prosecution (NIP) to the registered keeper within 14 days. NIPs are most commonly issued for offences caught by fixed cameras, like speeding. If the notice is served late, then a driver cannot be prosecuted.
If you’re driving a leased or hire purchase car, you could be lulled into a false sense of security if you receive the notice outside of the 14-day time limit. However, this 14-day limit only applies to police sending the notice to the registered keeper, which in the case of hire-purchase cars means the leasing or finance company.
As long as the police have sent out the first notice in good time, you, the driver, can still be prosecuted, even if you receive a notice several weeks later.
Change of address
If you’re leased a car and change your address, it’s essential that you let your leasing company know. Otherwise, you risk a visit from the bailiffs and your driving license being seized by the DVLA. For example, the following chain of events could lead to these circumstances:
- Your vehicle sets off a speed camera.
- The police write to your lending company, as they are the registered keeper.
- The leasing company provide the police with your old address.
- The police send a request for your details to your old address.
- When the police don’t receive a reply, a court summons is issued.
- You know nothing about the court summons, don’t go to court and are convicted in your absence.
- The court imposes a fine and six automatic penalty points.
- When the DVLA finds out, they revoke your license.
- When you don’t pay the fine that you didn’t know about, the bailiffs come looking.
Avoid this undesirable situation by letting your leasing company know when you move.