In the driving seat

Dom la Hausse de Lalouviere looks at car loan options

Windfall shares, an economic recovery and falling unemployment - these three features look set to ensure that thousands of new customers are signed up by the car industry next month as the release of prestigious R-registration plates sends buyers scurrying towards showrooms.

Many of these cars are sold throughloan schemes. There are two main types of deal: those offered by car manufacturers' finance companies, and those available from financial institutions. The former typically apply to new and used cars purchased via dealerships, the latter to private purchases.

The zero per cent finance deal is the best available from manufacturers. Monthly repayments are low: for the Vauxhall Corsa Merit, pounds 173.35 a month over two years. However, to qualify, a 50 per cent deposit of pounds 4,170 is payable.

Another option is the split deal purchase. "The trend among purchasers is to replace their new car after two or three years," says David Nash, of Ford Credit, the loan arm of Ford Motor Company. Although a deposit of about 20 per cent is needed, monthly repayments are lower.

For example, the Fiesta Fusion, with an on-the-road price of pounds 8,795, costs pounds 135.70 a month for 24 months on the Ford Options plan after a 30 per cent deposit. Similar deals apply to GM cars. Over a three-year period on the Vauxhall Choices plan, the monthly repayments for a Corsa Merit, costing pounds 8,340, are pounds 141.04 plus a 20 per cent deposit.

At the end of the contract, customers can sell the car back to the dealership for a pre-arranged price; top up their deposit and drive away a new car; or buy the car for a set amount. With the Corsa Merit, it would cost pounds 4,100 to buy the car.

Plans similar to hire purchase are also available. A deposit of about 20 per cent is again required, and the resulting monthly payments are high: about pounds 350 for a car costing about pounds 10,000. The advantage is that after the final monthly payment, the customer owns the car.

In all these cases, the customer does not own the car until the final payment is made. Problems can arise if the car is stolen 23 months into a 24-month contract. In effect, people might be paying for a car they are no longer in possession of.

Mr Nash says: "Manufacturers are aware of this and encourage customers to take out insurance policies which cover them in case of such an occurrence."

Policies will pay out the new value of the car. However, only about a third of people take out these insurance policies, he adds.

Personal loans are the standard way of buying cars. While the customer owns the car from the outset and no deposit is payable, repayments are high. For example, monthly repayments on a pounds 10,000 personal loan (with protection) over three years from Lloyds Bank are pounds 376.97 at 13.8 per cent APR.

Under the Customer Credit Act of 1974, financial institutions can charge redemption penalties. If customers want to pay their loans off early, many banks make them pay a penalty. This can be two months' interest, in the case of Mercantile Credit, or one month if the loan is with National Westminster Bank.

Interest payments, as with mortgages, are not a fixed amount. At the start of the loan, the customer's monthly payments make up a higher proportion of interest than of loan repayment. Towards the end of the loan this is reversed. It is thus more expensive to pay a three-year loan off after 12 months than after 24 months.

With Mercantile Credit, the redemption penalty on a pounds 10,000 loan taken out over three years is pounds 176.14 after 12 months and pounds 82.19 after 24 months. Some banks, including Lloyds and Bank of Scotland Banking Direct, do not charge redemption penalties on unsecured personal loans.

Bank of Scotland has recently introduced a flexible car loan. This is a hybrid of contract purchase schemes linked to manufacturers and standard loans. No deposit is payable and the customer owns the car from the outset while interest rates are up to 5 percentage points lower than with car dealerships.

Useful publications: July's edition of `What Car' magazine. `MoneyFacts', a financial information provider, can provide details of all loans available on the market. Call 01692 500765 for a subscription.