Getting the cheapest car loan

The launch of the new 2007 number plates has seen thousands of Britons buy new cars, but many of these could be paying too much by using expensive car loans.

This month it is predicted about 400,000 people will buy a car, with many of them needing a car finance package to complete the deal.

And with this in mind, financial advice service Moneyextra.com has produced a guide to getting the best value car loans.

The most popular type of forecourt finance is currently hire purchase – where the loan is secured against the car you are buying.

This is often offered by car dealerships themselves, but means the car is not owned until the final payment has been made.

And it is expensive.

Average interest rates for hire-purchase schemes are in double digits, whereas personal loans are currently available for less than six per cent. Although some hire purchase schemes offer 0% interest, typically deposits of as much as 40 per cent are needed to secure these deals.

As well as hire purchase, dealerships frequently offer contract purchase.

This sort of car loan sees a chunk of the car's value deferred until the end of the loan deal (typically three years) when either this "balloon payment" is due or consumers can swap the car for another or simply give it back.

Because you are buying a smaller proportion of the car, contract purchase payments are normally lower than hire purchase deals. But these deals need you to be on top of your money to afford the final payment.

Of course, buyers can also take out a personal loan to fund a car purchase from another institution before buying the car.

With rates of under six per cent available significant savings can be made in terms of how much interest is paid.

Additionally, having the money in place beforehand can put you in a better position to bargain on the forecourt because you are classed as a "cash buyer".

Personal loans are also free of the arrangement fees often attached to hire purchase schemes and can be arranged before you go to the showroom and not taken out until you buy the car - much like agreeing a mortgage before you complete on a property sale.

And these reasons mean Moneyextra thinks car loans from personal loan providers are the clear winner in the value-for-money stakes.

"Drivers should not let the smell of a new leather interior lure them into poor financial decisions at the last hurdle," argued Robin Amlot, senior editor at Moneyextra.

"By taking the time to arrange finance before visiting the forecourt, motorists can be sure that they will enjoy every mile in their new car and be certain that they are getting more metal for their money."