Negotiating a Car Finance Deal
More than 90% of new vehicles in the UK are purchased via some kind of finance arrangement. But while car finance deals can make a new ride affordable, if you’re not careful they can also saddle you with high interest rates, additional costs, and inflexible conditions.
Many consumers, daunted by the terminology and cowed by aggressive sales tactics, will accept the first finance deal the dealership offers them. Dealers make a significant portion of their profit on commission on these deals, which means they have an incentive to oversell. But it also means they have a lot of room to move on these deals if you haggle.
Here’s how to negotiate the best car finance deal, to ensure you’re not being ripped off.
In this guide:
- Why it’s important to negotiate your car finance deal
- Don’t lose sight of the cost of the vehicle itself
- Keep your interest low
- Keep your loan term short
- Skip the extras
- Don’t be afraid to walk away
Before selecting your vehicle, you’ve likely done hours of research and shopped around. You may have also haggled with the dealer about the price. But all your hard work will be undone if you accept the first finance arrangement you’re offered at the dealership.
According to the National Franchised Dealer Association, nearly one in five car dealers make more than half their margin from commission on car finance deals. That means they have a vested interest in encouraging you to take on the most expensive financing option possible. They’ll likely subject you to a lengthy sales pitch, in which they attempt to sell you everything with your finance deal from extended warranties to rustproofing.
But it also means they have a lot of room to move if you’re prepared to negotiate with them. Here’s how to fight your corner and ensure you get the most favourable, inexpensive finance arrangement for your new vehicle.
It may seem simpler to haggle about the price of your monthly payments for the vehicle - that’s the amount of money you’ll see coming out of your bank account each month, after all. But you can’t lose sight of the total cost of the vehicle, and the total cost of the finance deal. In fact, discussing monthly payments, rather than the price of the car, is a tactic that dealers use to obfuscate costs and convince you to max out your budget. “How much do you want to spend each month?” they might ask.
But make sure you’ve established, and haggled about, the price of the actual vehicle before you arrange the car finance deal. You should also do some maths to find out how much you’ll be spending throughout the finance deal. This will include interest rates, fees, and add-ons. This will ensure you’re not overcommitting or being sold a vehicle or finance deal that is too expensive.
When paying for a car on finance, you’ll also have to pay interest on the loan. You’ll want to find the deal with the lowest interest rate possible. Your credit score will influence the rate the finance provider offers you, but don’t be afraid to ask them to adjust - they’ll have some discretion about the rates they can offer.
You can also limit your total interest payments, and thus overall costs, by putting down more money as a deposit and opting for a finance arrangement with a shorter term.
If you have poor credit history and the finance provider isn’t willing to budge, don’t simply settle for a car finance deal with an exorbitant interest rate. Don’t be afraid to walk away and seek out other dealers, finance providers, or different ways to finance your car purchase, including guarantor loans.
While it might be tempting to sign up for a finance product with a lengthy term to reduce your monthly payments and help you pass affordability tests, long loans come with risks and costs. Borrowing money for a longer term means that you’ll pay more in interest.
Additionally, a longer term increases the length of time you’ll be in negative equity on the finance product. Negative equity means you owe more on the vehicle than it is worth and occurs because cars are depreciating assets, especially in the first months of their life. If you’re in negative equity, you won’t be able to sell or trade-in the vehicle if your circumstances have changed and you need a new car or can no longer afford the repayments, without paying hundreds or even thousands of pounds out of your own pocket first.
Avoid any car finance deal with a term over five years, even if the dealer or finance manager is pushing it. Three or four years is the sweet spot.
Dealers and finance providers will try to get you to bundle everything from GAP insurance and servicing packs to PPI with your car finance deal. Some dealers will even try to sell you unnecessary extras like home insurance when you’re just looking for car finance.
In general, you should be wary of these extras and not agree to any additional provision that you haven’t thoroughly researched and run comparisons on. Carelessly tacking on all the extras that the dealer pushes will inflate your monthly payments and total cost for the vehicle, while beefing up the dealer’s profit.
The right vehicle at the right price isn’t ultimately right if you’re going to be locked into and unfavourable and expensive finance deal to buy it. If the finance provider isn’t willing to budge on a high interest rate or lengthy term and keeps aggressively pushing extras, you shouldn’t be afraid to walk away and seek out another vehicle, and another financing product, elsewhere. In fact, if you show a willingness to walk, some of those non-negotiable rates and prices may start moving.