Car bank loans explained
Borrowing from your high street bank
This page offers important information regarding a bank loan to buy a new used car. If you have a good relationship with your bank and your credit history is very great, a bank loan is a simple and quick way to get your hands on the cash you need to buy another car.
Loans have never been as cheap as they are right now. With a price war between lenders (and Brexit), interest rates have plummeted over the past couple of years. But even the lowest interest rate loans can have hidden costs. Before you pick this type of loan, it’s crucial to decide the exact amount you plan to borrow and for how long.
The formula is simple:
Borrow as little as possible, repay as quickly as possible
To avoid complications, always base your borrowing on what you can comfortably budget for each month, as borrowing too much and missing crucial payments can lead to major problems down the road.
Beware – As I mentioned in the previous article regarding Hire Purchase: While borrowing over a longer period spreads the debt and decreases monthly repayments, it massively increases the interest you’ll have to repay.
Borrow £5,000 at 7% over three years and the interest cost is £557 with a monthly repayment of £154.
Borrow the same over 10 years and the interest balloons to £1,966 with a monthly repayment of just £58. That’s an interest hike of £1,409.
Beware of car loan ‘representative’ rates
All advertised loans are ‘representative’. In fact, just half of all successful loan applicants actually achieve the advertised rate. Credit scores, repayment history with the bank, employment details and personal circumstances all contribute to fluctuating interest rates. So look carefully into your interest rate should you be accepted and before you sign on the dotted line.
In truth, the only real way to find out whether you’ll get the advertised rate is to actually apply, but know that this leaves a credit check search on your file, which can affect how easily you’ll get credit in the coming weeks and months. I’d recommend obtaining your credit score before applying for a loan of any kind. This way you can predict (in part at least) if a leader is likely to bring you the result you want.
When borrowing more money for a used car works out to be cheaper
You’ll find boundary rates set by each bank based on loan amounts.
This is certainly something to think about because if you’re borrowing a sum of money that’s close to your bank boundary rate you might save by borrowing just a little bit more.
Let’s imagine there’s a car you have your heart set on that’s £3,499. The bank is offering you a loan at 14.9% over five years which result in £84 monthly repayments. Over the full term of the bank loan for your car, the total you’d pay back is £4,983.
But if your bank boundary rate was £3,500, and you borrowed just £1 more and the interest rate was reduced to just 8%, you’d be repaying £70 per month and the total you’d pay back is just £4,258.
That’s a £725 difference! Wow.
So if you think a bank loan is the most suitable way for you to borrow money be sure to do your homework first. You might save yourself a whole lot of money.
The Used Car Guy