Buying a car on finance is still a cost you have to be prepared to pay for the foreseeable future. Regardless of the time you sign up for the financial agreement, it’s a lot to commit to, especially when that’s just to pay for the car and not for everything else that comes with it.
Car finance is frequently more expensive than it appears, as borrowers will only focus on the low monthly payments rather than the total ownership costs.
There are many hidden expenses that lie beneath the general information on car finance, which a lot of people often overlook or ignore. From high APRs to balloon payments and add-ons, all of which can significantly increase costs.
This guide will explain why you might be paying a lot more for your car finance than you might think.
Key reasons why your car finance costs more
There are several reasons why your car finance is likely to cost you more than you think. This includes the following:
Total cost neglect
Focusing on only the monthly payments will result in hiding the total interest paid, especially when it comes to longer terms of payment.
Balloon payments
These make monthly payments look more affordable; they are often larger in the interest-accruing debt that’s due at the end.
High APR & interest
Even small APR differences will add a lot of money over the term of your agreement, so it’s good to be aware of what this looks like.
Hidden fees and add-ons
There are some hidden fees often added to the car deal that increase the total price. From brokerage fees to admin fees and unnecessary insurance/warranty add-ons.
Depreciation and maintenance
It might be that you owe more than the car is worth, which can result in costs rising once service plans ultimately expire.
How to reduce costs
To help reduce costs, there are some ways you can improve your car finance costs. A larger deposit, if you have one available, will reduce the total interest you pay over time. A short term will also decrease the total interest, but it’s worth being aware that it raises monthly payments.
Comparing rates is important too, from lenders and not just from the dealer. It’s worth checking your credit score first. You should also consider the alternatives, as personal loans can also be cheaper than PCP or HP deals.
Being aware of the hidden commission scandal and how to claim
Talking of PCP and HP deals, there’s the hidden commission scandal to discuss, especially as many car owners may be entitled to car finance claims as a result of this scandal.
Discretionary Commission Arrangements were banned by the FCA in 2021. Before this, finance brokers, aka the car dealers, were allowed to set high interest rates and would inflate these interest rates in order to boost their own profits.
Many millions of people have been affected, so it’s worth checking if you have a right to claim, as many agreements are paying out around £700 per claim. To do this, you’ll need to check your old paperwork between 2007 and 2021 for the words ‘commission’ or ‘high interest rates’. To recover the costs, the FCA is currently conducting a review.
This will likely result in an automated redress scheme early this year, but you can also go through companies to claim too.
Your car financing might be costing you a fortune, so it’s good to know how to save money on any future purchases and agreements you sign up for.
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