Car Loans Vs Forecourt Finance

After their house, a car is usually the second most expensive purchase ever made by an individual or family.

Few people are in the position to pay for their vehicle in total from their own financial reserves and often some form of loan or finance is required. Finding the very best deal possible is usually critically important to the majority of car buyers.

There are a vast number of loans available for this purpose and the position can be complicated and difficult to understand. To simplify this, it may help to see these loans as broadly coming into three categories

• Personal Source Loans – the car purchaser obtains a loan from their own sources that are not directly related to the vehicle or the selling dealer. Examples may include a bank or building society personal loan obtained specifically for the purpose of buying a car.
• Manufacturer related loans – these are usually offered for new or recent second hand vehicles probably sold under manufacturer or dealer’s warranty. They may be intended primarily for the purchase of a vehicle of a specific make. So as an example, PEUGEOT Finance may specialise in loans for the purchase of Peugeot vehicles, and FORD Finance may specialise in offering loans for new or warranted second hand Ford cars and so on. These types of loans are normally made available through dealers who also may be linked to a manufacturer so a BMW dealership many specialise in selling BMW cars and may offer purchase finance through BMW finance. If a BMW dealer has a second-hand vehicle such as a NISSAN taken as part-exchange, then it is possible that in some cases BMW Finance loans may be available to purchase it as the dealer will wish to shift the car off their forecourt.
• Forecourt loans. These are usually offered by dealers selling vehicles and are provided through the services of third-party finance companies. These sorts of finance are typically not related to any particular make or model of car.

All three types of car loan schemes have their characteristics and potential pros/cons.

Banks.
Bank and related high-street product loans are sometimes a very cost-effective way to finance a car purchase. The usual credit checks with will be made and the bank will want to know that the applicant will be able to afford and meet the repayment schedule. If during the lifetime of the loan some problems with income arise, then banks and building societies may be among some of the more sympathetic lenders who will look to re-schedule the debt if they can.

On the downside, banks can be reluctant to advance loans for vehicles that are more than 2-3 years old at purchase. Based upon hard experience, they may also have a very pessimistic view of the residual value of a second-hand vehicle and as a result may ask for a significant personal contribution from the borrower by way of deposit.

Manufacturer Linked Schemes.
Most car manufacturers want to sell as many of their vehicles as possible and as a result may sometimes offer incentives such as low deposit schemes, cash back offers and payment holidays etc. Their interest rates can also at times be very attractive. Typically they will also have a more optimistic view of residual vehicle values so may advance more in the loan than a bank would.

It is worth being careful with the combined price of the vehicle and finance. Sometimes an individual dealership may be able to offer the car at a lower price if the buyer is paying via a bank loan (i.e. a cash buyer from their point of view) than they can if the buyer is taking their finance. The interest rate and cash back schemes may look very attractive, but in fact the dealer may be ‘recovering’ these offers in the minimum price for the vehicle they will accept.

Third-Party Forecourt Loans.
These deals are highly varied in nature and terms and it can be difficult to generalise. Typically though they do have the advantage that they may accept more marginal cases in terms of credit checks and also may be less strict in terms of demanding deposits. Some will also have a fairly favourable view of residual values and it may be possible to borrow slightly higher loan amounts. They can sometimes be one of easier channels for finding a loan for slightly more elderly second-hand vehicles.

It may be necessary to exercise some caution with these deals as some companies in this sector can charge much higher interest rates than banks or manufacturer schemes. Some also have a very low threshold of sympathy for borrowers in arrears and may seek to repossess a vehicle much faster than would one of the other scheme types.

In summary, as always with finance, shopping around is highly advisable.

• Car purchase loans obtained via banks may offer attractive interest rates and allow hard negotiation with a dealer as a ‘cash buyer’.
• Forecourt loans from a manufacturer’s scheme can offer attractive additional benefits and attractive interest rates but may in some cases be limited to certain marques or newer vehicles.
• Forecourt third-party loans may be easier to obtain than some others but their interest rates may be higher and they may repossess a vehicle quickly in the event of payment defaults.