PERSONAL LOANS

As the name implies, you borrow the money for personal use based on whether you are a good credit risk but some financiers will now monitor what the funds are being used for. Depending on your assets and personal circumstances, the amount you can borrow and the terms are usually negotiable. Watch for hidden costs like establishment fees.

LINE OF CREDIT

Buyers with equity in property often establish a line of credit for a pre-arranged amount that you can draw on at an interest rate lower than most other loans. You may need to choose between a fixed or variable rate. The down side is that if interest rates soar and you end up in financial strife, your property could be at risk. The upside is that you pay interest only on the money that you draw down which drops to zero as soon as the money is returned to the account. This can suit buyers who only need access to a loan at certain times of the year.

HIRE PURCHASE

Unlike personal loans, you don't actually own the car until the final payment has been made, meaning that any missed payments could see you losing your car. For buyers with no credit history or assets, hire purchase is often the only way of breaking the poverty trap of pumping endless funds into a worn-out car.

As long as you're sure you can afford the repayments, hire purchase schemes offer reasonable value, explaining their continued strength in the face of newer alternatives. Shop around for the best deal.

LEASING

Leases vary but the principle is the same. A finance institution funds the difference between the purchase price of the vehicle at the start of the lease and its projected residual value at the end. Monthly payments vary according to the agreed interest rate, length of lease period and the projected residual value. The payments cover the interest and projected depreciation but not the car. At the end, you might choose to purchase it outright for the agreed residual value or you can re-lease it.

What happens if the residual value is higher than what the car is worth? You may have to pay the difference to get out of the lease. Leases are usually structured to provide tax relief and may not be suitable for buyers where this does not apply. Leasing terms and conditions are highly competitive so shop around.

WARNING

Most financial arrangements are structured so that payments cover mainly interest for the first year or two. If you have to sell the car early, the sale price may not cover the loan or lease because the car's value will have dropped faster than the amount owing. Extra money will usually be required to break a financial arrangement in the first two years. If a seller invites you to take over the book or pay the balance of a lease or loan, check it out carefully.

Article by Joe Kenwright and the Carsales Network

To comment on this article click here
 

 » Find a new or used car at the carsales network