Most car buyers will have spent hours researching makes and models of car before deciding what to buy. Then four out of ten sign up for the car within 30 minutes of stepping inside the showroom.

But will their diligent research extend to finding the cheapest source of finance? It seems not. Almost 50% of new cars bought privately are bought on finance and nearly 20% sign up for the finance deal offered by the manufacturer. That could turn out to be a costly decision. With manufacturers finance typically costing 13.7% over a 3 year including a 10% deposit, they could be throwing about £1,800 down the drain.

Someone buying a Renault Megane Sport Saloon Privilege costing £16,000, would end up paying £17,384 over the full 3 years. However, if you have a good credit history, you could get a personal unsecured loan at only 5.5% and end up paying just £15,631 – that’ll give you a saving of £1,753. This illustrates that accepting the showroom’s finance instead of shopping around for a low rate loan, can hit your pocket hard – its like giving back the discount we hope you negotiated!

I can hear you telling me about the special finance offers that the manufacturers advertise extensively. Yes there are some good deals but always look closely. Some only relate to specific models and specific specifications, often the cars that the manufacturers are having trouble shifting, and some deals have stings in their tails. Take the current offer on the Volkswagen Polo E2. This deal is advertised at 5.8% with a monthly repayment of £99 over 35 months - but at the end you’ll find you have to make a final balloon payment of £3,750 or trade your E2 in for another Volkswagen.

The manufacturers offer these deals to encourage brand loyalty and a repeat purchase in 3 years time. They know that most people will trade their car in after 3 years rather than find the large balloon payment.

Of course, manufacturer’s finance and cheap personal loans are not the only way you could finance your car.

Hire purchase is the traditional way to pay for your car. Here you pay a deposit usually of at least 10% or trade in your existing car for at least the same value, and then your HP loan for the balance, is secured on your car. Therefore, in practice your car still belongs to the hire purchase company until you have made your final monthly payment.

If you want to sell your car before you’ve completed the HP agreement, there will almost always be an early redemption penalty – often two or three months interest. The HP company will always register its interest in your car with HPI the finance tracking agency. This will effectively mean that you will not be able to sell the car until you have paid off the balance of the HP you owe.

The other alternative is Personal Contract Purchase. These are the deals most dealers will attempt to sell to you. You also agree the annual mileage you expect your car to clock up. Then you pay a deposit and part of the purchase price is deferred until the end of the agreed payback period. Your monthly repayments then pay off the balance and the interest. These schemes are very flexible so you can choose the length of the car loan and the amount of the deposit but interest rates vary considerably between lenders. At the moment the average is about 12.8% - still well above the 5.5% rate for a cheap personal loan.

At the end of a PCP contract you’ll have three options – pay off the deferred sum and keep the car, trade in the car using the trade in value to help pay off the deferred sum and hopefully leaving a balance towards a new car, or hand in the car and walk away with nothing more to pay.

This last option is always subject to the provision that your cars’ condition reflects normal wear and tear and its mileage is in line with the annual mileage you agreed when you purchased it. If the mileage exceeds the agreed mileage, then you’ll have an excess mileage charge to pay based on the number of excess miles. The cost per excess mile will be specified in the PCP agreement.

One of the advantages of PCP is that the guaranteed buy back option, effectively protect customers against excessive depreciation.

As the dealers take a commission for selling the PCP contract you may find that they will give you a bigger discount off the price of your car or even throw in a low cost servicing package or low cost insurance. But you’ll need to do a little homework to ensure that these extra goodies are truly worth the extra interest you’ll have to pay within the PCP contract.