Millions risk being caught out by costly car finance deals
However, 44% of borrowers fail to shop around for a better deal when applying for car finance and 38% often mistakenly think the car dealerships usually offer the cheapest rate, according to research by Compare the Market.
The price comparison website found that drivers are set to spend an average of £15,042 on a new car, with 39% planning to buy either an electric or hybrid vehicle. The main reasons that drivers cite for buying a car include the need to replace their old vehicle (27%), wanting to treat themselves after a difficult year (18%), and switching to a more environmentally friendly model (18%).
A further 17% of drivers want to upgrade as they plan to take more road trips this year, and 14% of drivers plan to buy a car because they are worried about using public transport after the pandemic.
Car dealerships also usually offer Hire Purchase (HP) or Personal Contract Purchase (PCP) loans to people buying a new car. But Compare the Market says that for most borrowers with a good credit history, a personal loan from a bank or building society often has a lower interest rate. Using a personal loan also has other advantages such as not requiring a deposit, no balloon payment at the end of the loan, and less risk of repossession if a loan repayment is missed.
The FCA introduced a ban on dealerships from using ‘discretionary commission finance’ in January. The regulator estimated that this commission model – which gave dealers an incentive to hike car finance costs – meant consumers had been paying £165m a year more than they needed to.
Ensuring borrowers have the most appropriate credit product when buying a car is important as many have struggled to repay loans during the pandemic. More than a third (35%) of borrowers said they had problems repaying their car loans during lockdown, including 15% of borrowers who took a payment holiday, and 9% who defaulted on their loans.
Rob Silvey, manager for car finance at Compare the Market, said: “It is encouraging that so many motorists are keen to hit the road in new cars as lockdown restrictions have been lifted. Lots of drivers will be keen to make up for lost time with trips to visit friends and family and staycations. Others will understandably want to reward themselves after making it through a tough year. However, our research shows drivers do need to be careful to avoid being caught out by car finance when buying a new vehicle.
“Taking the finance deal offered by a car dealership can be like getting foreign currency at the airport – it may end up costing considerably more for the convenience. Drivers should always try to shop around on car finance if they want to make sure they get the best deal.”