The sales offensive for new-season tourers has begun. The 2005 model year caravans are now on sale, and at the Earls Court Show, in November, dealers and manufacturers alike will be vying for our custom.
But not everyone will buy with their own money. As a nation, we are currently £1 trillion in debt and more caravans than ever are being bought on credit. But is that a good way to fund your purchase – and if so, what's the best way to borrow the money?
Over the next three pages, we explain, in plain English, everything you need to know about caravan finance. We take you through the different types of loans, show you how to get the best finance deal and reveal how we got on when we posed as a buyer looking to borrow £11,000 for a 2005 model year Bailey Pageant Bretagne. If you're thinking of buying a new or second-hand caravan, what follows could save you almost £2000.

How does the caravan finance market work?
If you buy a new or second-hand caravan from a dealer, they can arrange finance for you. These loans are almost exclusively hire purchase, or HP, agreements (see panel on page 72). The dealer has a tie-up with a finance company and receives commission on each HP deal they sell. Two finance companies dominate the market – Black Horse and Capital Bank Leisure.
A personal loan is another common choice.
Because a HP agreement is made through a particular dealer you must buy your caravan through that dealer. But with a personal loan, you can spend the money on any caravan – new, secondhand, from a dealer or a private sale. You could, of course, buy with a credit card, but unless you can pay off the debt quickly (or the card has an exceptionally low interest rate) this is a very expensive route.
Home owners can take out a larger mortgage to fund their purchase. This is often called ‘mortgage equity withdrawal'. As with a personal loan, you can spend the money as you want. Mortgage interest rates are lower than those for personal loans, so it's tempting at first glance. However, the mortgage repayment period may be longer than for a personal loan and you could end up repaying more overall.

How does hire purchase (HP) work?
You usually pay a deposit (the amount of deposit is up to you) followed by monthly repayments for an agreed period. Repayments are normally fixed. After the final repayment, the caravan is legally yours. Until then, it is legally owned by the HP company, although you act as the owner from day one.
HP is available from caravan dealers and because the loan is secured on the caravan, it is easy to obtain. HP gives you added protection under the Consumer Credit Act. If the caravan develops a fault that the dealer or manufacturer won't fix, for instance, the HP company could step in to fight your corner. Since the caravan legally belongs to the HP company, until you make the last payment, they have a vested interest in ensuring that any serious faults are rectified. (They might have to sell the caravan to get their money back if you default on payments – which they won't be able to do if, for example, it is suffering from damp) So if you have a valid claim and can't get any sense out of the dealer or manufacturer, Black Horse and Capital Bank Leisure press officers say that they sometimes step in and use their clout as big-name financial organisations to sort it out.

How does a personal loan work?
There are two types of personal loan – secured and unsecured. Unsecured personal loans are more common. You receive the loan amount up front and make monthly repayments for an agreed period. You're free to spend the money as you see fit, so you can buy any caravan from any source.
A secured personal loan works in the same way, except that you borrow the money against an asset, typically property. If you default on the loan, the lender can use the asset to recover their money.
With a personal loan you own the caravan from day one. Most fix the interest rate for the length of the loan, so repayments remain constant. A few vary the rate, which means repayments rise and fall as interest rates change. Personal loans are widely available from high street lenders, banks, building societies and on the internet.

What's the difference between HP on a car and a caravan?
Very little. Caravan HP schemes often let you spread repayments over a maximum of ten years, while with cars you are normally limited to five years. Also, car manufacturers sometimes subsidise HP with zero or low-rate finance to increase sales. This is extremely rare in the caravan industry.

Is it better to borrow or to use my savings?
It's nearly always cheaper to use your own money. There are only two reasons for borrowing when you already have sufficient cash. The first is when the interest rate on the loan is lower than the interest rate on your savings, but this is rare. Second, you might prefer to keep some savings to fall back on in an emergency. However, you must balance the reassurance against the extra cost of borrowing.

The cost of borrowing
The annual percentage rate (APR) is the loan interest rate calculated using an industry-standard formula. Generally, the lower the APR, the cheaper the loan, but there are anomalies, as our table below shows. Despite this, the APR is usually a good guide to the overall price of a loan.
When dealers talk about interest rates, they will usually refer to the 'flat rate, which' is just a different way of calculating interest that is roughly half the APR. By law, every lender must make you aware of the APR before you sign a finance agreement – make sure that they do, so you don't end up thinking that the loan is cheaper than it really is.

How can I compare deals?
To find out which deal is cheapest, ask for the ‘total amount repayable', including all admin fees. This shows how much you must repay over the whole loan period. It's also vital to ensure you can afford the monthly repayments. If you can't, forget it – no matter how cheap the total amount repayable.

How can I reduce the repayments?
Find a HP agreement or personal loan with a lower interest rate. If you can't, you can reduce the monthly payments by increasing the length of the term, although over the full loan term, you'll end up repaying more. Here's a typical example of a £5000 personal loan:

3yr loan

£154.07

£5546.52

5yr loan

£98.06

£5883.60

Do interest rates vary according to how much I borrow?
Yes, and every lender weights them differently. When we shopped for finance, here's how the rates for a Co-operative Bank personal loan changed, depending on the amount borrowed:

£2000-£2950

15.9%

£3000-£4950

12.9%

£5000-£15,000

7.9%

Above £15,000

6.9%

Rates are often lower when you borrow more. This is mostly a case of economies of scale for the lender: if they are lending a smaller amount, they will need to charge a higher interest rate to maintain profit margins. But it doesn't always follow that a larger loan means a lower APR. At the time of writing, the Alliance & Leicester's cheapest loan rates applied to loans of £7500-£15,000, but increased for loans of more than £15,000. So shop around to get the best deal on the amount you want to borrow.

Can I haggle over finance?
You'll have limited success with big-name lenders on personal loans, but it never hurts to ask for a cheaper rate. Caravan dealers will generally negotiate on HP rates, so play off one dealer against another. Watch that they don't make the monthly repayments cheaper just by extending the loan period; this just means you'll pay more overall.

What if my caravan is stolen?
With a personal loan, the lender won't be concerned: you must continue to make your monthly repayments until the loan is paid off. With HP, it's a different matter and the HP company will expect you to settle the rest of the loan with one payment. That's why most HP agreements insist the caravan is insured. Whatever the type of loan, insurance is highly advisable.

What if I sell my caravan before the end of the loan?
With a personal loan, it's up to you; the lender won't care provided you continue to repay the loan, or pay back all the money along with an early-payment penalty. It's more complicated with HP. You must tell the HP company that you intend to sell the caravan, and they give you a final settlement figure. Technically, you must pay this sum before you sell the caravan, but in practice most HP companies accept the payment as soon as it is sold. You should also tell prospective buyers that you will settle the outstanding HP finance in full upon sale: if you don't they will find this out during the CRiS search.
If you settle a loan early, some lenders will charge you a hefty penalty, but others don't. Always ask, and read the small print before you sign any agreement. On a caravan HP deal, the standard additional charge for early settlement is two months' interest.

What if I fall behind with the repayments?
Whether you have taken out a personal loan or an HP agreement, if you've over-stretched yourself, talk to the lender. Reputable firms usually offer a pragmatic solution, such as paying less each month but over a longer period, or taking a temporary break from repayments. The loan will cost you more in the long term but it will be more manageable.

How can I protect myself against missed payments?
You can pay an extra monthly sum on top of your usual repayments to insure yourself against these eventualities. This is often called ‘payment protection insurance' and will cover repayments if you become redundant or sick.
The level of protection and pay-out varies from one lender to another, so shop around and read the small print carefully. Sometimes a company offering a cheap loan will recoup their profit with expensive payment-protection insurance. Payment protection on an HP loan is generally cheaper than on a personal loan. But in either case, payment protection is a sensible choice.

Shopping around
To show how easy it is to find cheaper finance for a caravan, we spent a day posing as a buyer. By the end, we had saved more than £1,700. Here's how. We wanted a 2005 Bailey Pageant Bretagne, list price £12,184, and told lenders that we wanted to borrow £11,000 over 60 months, without payment protection insurance. Why no payment protection? Payment protection policies differ in the degree of cover they offer and the cost is often weighted by individual circumstances. For this experiment, we wanted to keep it straightforward.

Checking out HP deals
We began by ringing around caravan dealers for HP deals. The first was Weymouth Caravans. We spoke to Les, who said we'd pay £250 per month on an £11,000 loan from Capital Bank Leisure. After some gentle haggling he said he'd do it for around £240. We had to push hard for precise figures: £135 arrangement fee for the first month, £243.56 for the next 58 months and a final payment of £318.56. The total amount repayable was £14,580.04. Les told us that the annual APR was 12.1%.
Next, we called Brian Fuller Caravans in Suffolk, where we received a better deal. Paul told us they used Black Horse and quoted a first payment of £361.25, 58 payments of £228.25 and a final payment of £288.25. The total was £13,888, with an APR of 10.9%.
Read Caravans in Blackburn were also helpful and John offered to reduce the Bailey's price to £11,799, which gave us the option of either borrowing less or using less of our savings. As we needed a quote of £11,000 we'd pay for £799 with our own money. John told us that we'd be looking at 59 payments of £230.74, plus a final payment of £290.74. Total: £13,904.40 with an APR of 9.9%. The deal was with Black Horse.
Armed with two similar Black Horse quotes, we contacted a third Black Horse dealer, Centre Caravans in Oxfordshire, where the Bailey was £12,184. Ted originally quoted us £230.84 per month, but we asked if he could better our existing quotes. Half an hour later, he called back to offer 59 payments of £228.06, with a final payment of £288.06. At £13,743 all in (APR 9.5%), the new offer was £167.40 cheaper. Our last dealer was GT Caravans in Hertfordshire. David offered the caravan for £11,500 and his Capital Bank HP deal was £233.42 per month, plus an extra £110 arrangement fee in the first month. All told, the cost was £14,115.20 (APR 10.7%). The discount on the Bailey helped to balance the higher price of the HP finance.

Comparing personal loans
We felt we could save even more, so we looked at personal loans from seven well-known lenders (see panel on page 71). We got all our quotes easily: six on the internet, two by phone. The most expensive was a Black Horse personal loan, with a total repayment of £14,166.60 – dearer than its HP deals. The cheapest was Alliance & Leicester's very keen £12,838.80. That was an astonishing £1741.24 cheaper than the first HP quote we'd received.

Getting another loan in the future
Had we included payment protection in our figures, the HP deals might have been more competitive and attractive to some buyers. HP is often easier to obtain than a personal loan, offers extra consumer protection against faults, and potentially gives an easier ride if you want to take out another loan at a later date. This is because, when you take out HP, the loan is secured on the caravan. If you default, the lender takes the caravan and sells it to clear the debt. With unsecured personal loans, if you default, the lender can pursue you through the courts. But if you are unable to pay, the lender will have problems recovering their losses. This is why it's often easier to obtain more HP: there's less risk of loss for the lender.
Say you've bought your caravan on finance and want a loan for a new kitchen. If you bought on HP, the lender will look more kindly on your application for this new loan because your existing loan (with them or another lender) is largely underwritten by an asset (the caravan). If your existing loan is an unsecured personal loan, they will regard you as a higher credit risk, making it potentially harder for you to take out another personal loan.

What's the best option?
Overall, it was an easy decision: personal loan.
Not only would we save a four-figure sum, but we'd own the caravan from day one, unlike with HP. It would be simpler if we sold the caravan before the end of the loan and, best of all, we could buy it wherever we wanted. GT Caravans' price of £11,500, £684 less than list, sounded good. Throw in the cheaper finance and we'd save a whopping £2425 on the first quote we'd received – not a bad day's work. It just shows that it pays to shop around.