Purchasing a new car is one of the biggest decisions a household can make, and one that can have long-lasting financial implications. Therefore it is important to make sure the financial planning behind the purchase is sound and able to deal with unforeseen incidents that could require a shift in resources to other expenses.

There are two main options to new car financing; either a traditional loan from a bank, building society or dealership or a hire-purchase agreement.

The biggest decision regarding a loan is the interest rate - dealerships can provide finance deals but often their interest rates compare less favourably than banks or building societies. Compare the APR offered from the different potential lenders in order to effectively compare how much you will end up paying back each year.

If you find it hard to make sense of the different options, the Office of Fair Trading can provide free resources, such as the APR and rebate calculator, to help make comparison easier. A longer repayment period will cost less month to month, but more in total over the term of the loan. In addition to the loan itself, it is important to calculate related costs such as road tax and car insurance before negotiating the terms of a loan.

If the repayment period is fairly lengthy it may be worthwhile looking for a lender that offers repayment holidays. Though it's not advisable to repeatedly delay payment, a one-off deferral may be useful should unexpected household expenses arise. Payment holidays should be agreed upon during the initial term negotiations, as lenders frown upon renegotiations during the repayment period to ask for it.

A hire-purchase agreement is generally a more complex form of car finance, and requires more attention to detail when agreeing on the terms of repayment. Hire-purchase agreements essentially differ from loans in that ownership remains with the lender until all payments have been made. The agreement should therefore contain all the details on the number of instalments and the full hire-purchase price of the car.

There are also a number of pitfalls to watch out for. For instance, interest-free credit offers might sound appealing, but failing to make all the payments in the stated period could result in significant interest rates being imposed on the loan.

So if you're looking to purchase a new car in the near future, keep in mind the aforementioned points to make sure your car is financed by terms that suit your household budget and can accommodate any unforeseen bumps in the road.

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