The Pitfalls of a Flat Rate Interest Car Loan

On Any Car Financing Deal Make Sure Actual Percentage Rate Is Known

Mar 7, 2009

Buying a car is for many people the second biggest purchase after a house that they will make, so finding the best and cheapest car loan is essential.

What are the things that have to be considered when buying a car? For many it’s not the cost of the car loan it might be the aesthetics, the colour, and interior, are the seats leather and is the dashboard walnut? Is it mechanically sound and will it get from A to B five days a week, is it fuelled by petrol, diesel, LPG or one of the new bio fuels? All these choices have cost implications and consumers should take appropriate advice before making a purchase.

Best Time to Buy a Car

In the prevailing credit crunch conditions it is without doubt the best time to buy a car. As stocks pile up on garage forecourts and storage facilities around the country, companies are desperate to move the vehicles. It is the time to haggle, play one dealer off against another in search of the best deal. This should of course include the cost of car financing.

Most garages will offer their customers a car loan to keep the deal in-house, and the owners will smile happily when people take up this offer. Why are they smiling? Well they might be naturally happy people, but it’s probably because the customer has signed up to something which adds to the company's profit margin. The advice from many experts is that unless the garage is running a 0% interest car loan promotion there are probably better finance options available elsewhere.

Flat Rate Interest Car Loan

Let’s look at a favourite tactic often used by the slick sales people that inhabit a garage forecourt. It’s called offering flat rate interest.

A flat rate interest car loan works like this: The interest is charged on the original amount borrowed no matter how much has been repaid. So for example if £8,000 is borrowed over four years even in the last year and much of the loan has been paid off, interest is still being paid on the original £8,000.

So if a salesman offers say 6% interest and it sounds too good to be true it probably is. It’s essential to ask is this rate a flat rate or an Actual Percentage Rate (APR)? A 6% flat rate is equivalent to about 12% APR. So be careful and ask the question.

APR Interest Rate

APR is the interest charged on the outstanding debt, which means on the last year of the car loan the interest will only be charged on the reduced amount. However, it is absolutely essential that there are no other charges, which have not been included in the APR, for example payment protection insurance (PPI). Again, ask the question: "Is PPI included or not?"

PPI on Cars

A final word on PPI: shop around. You don’t need to take it from the lender, there are many insurance companies out there which will probably offer a much cheaper rate.

Car Loan Advice

The advice on car loans is no different from any other type of loans. Don’t be pressured by the salesman, ask the correct questions and ensure the research is done before signing on the dotted line.

This information is obtained from the sources listed below but is not offered as financial advice.

The copyright of the article The Pitfalls of a Flat Rate Interest Car Loan in Mortgages/Loans is owned by Neil Gunn. Permission to republish The Pitfalls of a Flat Rate Interest Car Loan in print or online must be granted by the author in writing.