Consider your finance options carefully in order to get the best value for your money writes Geraldine Herbert
Thinking of buying a new car? With a multitude of finance options available it pays to spend time determining just what is the best type of finance to sign up for.
Aside from paying in cash your options include, a bank loan or credit union loan, Hire Purchase (HP) or Personal Contract Plans (PCP).
PCPS
An increasingly popular way to finance a new car is under a Personal Contract Plans (PCP). But what exactly is a PCP and who is it best suited to? A PCP is like a Hire Purchase agreement but unlike HP it provides lower monthly payments as the expectation is not necessarily to purchase the car at the end of the contract.
Nearly all car manufacturers now offer PCPs and the repayment schedule is split into three very distinct parts.
First, a deposit is paid – usually 10% – 30% of the cars value. This is either paid in cash or if you already own a car, you can trade this in for part or all of the deposit, depending on its value.
The car dealer then estimates what the new car will be worth at the end of the contract this is called a guaranteed future value and is essentially a forecast of the car’s value after depreciation. The figure put on the value of the car at the end of the contract is likely to be set conservatively; if it is set too low you will be paying higher monthly instalments to compensate but if it is set too high you will have lower payments but it reduces your chance of any equity at the end of the agreement.
The monthly repayments are the calculated by deducting the deposit and the guaranteed future value from the selling price.
At that end of the contract you have three options
1. You can hand back the car at no extra cost subject to the agreed terms and conditions.
2. Start a new PCP deal and use any equity in the car (if the car is worth more than the value put on it at the start).
3. You can pay off the “guaranteed future value” to buy the car.
So, for example, if your car costs €20,000 and the dealer estimates its value after three years as €10,000, you would make repayments on a €10,000 minus the deposit (10% – €2,000) plus interest on the loan.
At the end of the three-year term, you can pay the €10,000 (guaranteed future value) and take the car, give the car back and owe nothing, or start a new PCP on another car.
In some cases you can use the equity in the car to act as a deposit for a new PCP deal and get a new car via this method every few years. So, for example, if the final payment is €10,000, but the car is actually worth €11,600, you have €1,600 in equity to put toward the deposit on your next PCP.
PCPs are similar to a hire purchase agreement in that you can avail of the half rule, the ‘half rule’ means you can end the PCP agreement at any time and return your car. If you have not however, at this point in the agreement paid half the purchase price you will owe the difference between the repayments you have made and half the purchase price.
Benefits
The benefits of a PCP are low monthly repayments, rates for car finance are usually more competitive because some car manufacturers, such as VW, Renault and BMW, run their own ‘banks’ specifically to lend for car purchases, while others have pre-agreed packages with the major banks. Some makers even offer 0% finance.
The other major advantages are you get new car every three years, deposit rates are as low as 10% and you have a choice of what to do at end of repayment term.
Downsides
There are however downsides and if you do not keep up the payments the bank can, and will reposes the car. The car must also be returned in good condition so you may be charged for any scratches or any damage or if you have a crash and the cost of the repairs is greater than 66% of the original list price then you may also not get the minimum value you were hoping for. Other things to look out for are; high mileage could mean a lower minimum guaranteed value, you may be charged ‘arrangement fees’, typically €50-€150 and it is your responsibility to ensure the car is regularly serviced repaired, etc and you must stick to the mileage condition of the contract, this is usually around 15,000km-20,000km.
Car finance has been in the spotlight recently with fears over negative equity with the possibility that the guaranteed value may be well in excess of the actual market value. As a result in 2017 the State’s Competition and Consumer Protection Commission has launched a study into the impact of PCPs on consumers and the motor industry.
What are the regular misunderstandings and problem with PCPs?
It is important to remember that PCP adverts on the radio or Newspapers e.g. drive away in a new car for €200 a month are based on a 30% deposit not on a 10%. Also some buyers run into difficulties when opting for a second PCP contract as when they first entered into a PCP contract they used their existing car as a trade in so this usually equates to a 30% deposit. so you get used to the low repayments that come with a high deposit – however when the contract is over and you decide to opt for another PCP there is no car the next time to trade in so you need to have saved this to get the same deal again.
PCP work best for people who like to change their car frequently and would prefer to avoid the huge cash outlay of a brand new car but you have to read the small print and ensure you are aware of all of the terms and conditions.
Hire Purchase (HP)
Hire purchase is the simplest form of finance outside of a personal loan. With HP, you pay a deposit upfront (often 10%) and then pay the rest off in monthly installments over an agreed period. After the last payment you own the car. It is worth remembering with any HP contract, be if for a 3 piece suite, sound system or a car is you do not own the asset until the final payment is made. Two years down the line and €15,000 later if you can t keep up the payments you stand to lose both the car and all the money you have spent thus far on it
While PCP is a form of hire purchase the main difference is that with a PCP you have the choice to make the final payment to own the car at the end of the repayment term or walk away.
With a hire-purchase agreement, you are committed to paying off the car in full, although, like with a PCP, the car does not become yours until you make the final repayment. It’s important to check the APR. The longer the loan runs the more interest you pay.
The monthly repayments on a HP are usually higher because they are split more evenly over the term, rather than a series of small repayments with a large ‘balloon’ payment at the end, as is the case with PCP. However HP repayment terms can be more flexible, in that you can decide at any time to pay off the full HP value and become the owner of the car. With a hire purchase agreement, you do not own the car until you pay off every last cent on the HP deal. At the end of the agreement, the finance company passes ownership of the car to you, provided you have made all the repayments. Interest rates on HP deals are attractively low.
But with HP it is worth remembering that you can have the car repossessed if you continually miss repayments, while there are a range of fees and charges built into the deals.
Personal Loan
Borrowing money from a bank, building society or credit union gives you eventual ownership of a car. The main advantage of a personal loan is that you own the car while paying off the loan so if you got into financial difficulties you could sell the car.
The best way to compare loans is on APR – the annual percentage rate as this allows you work out how much a loan will cost you over its lifetime.
While rates have dropped in the past number of years it is a more expensive option to borrow from the bank or credit union. For example if you opt for a loan from Ulster Bank of €10,000 over 5 years the APR rate is 8.5% so 60 monthly repayments of €203.64 will mean the total amount repayable €12,218.or the total cost of finance is €2,218. The same loan from Bank of Ireland would cost you with an APR of 7.5% the amount repayable would be €11,954.40 representing a total cost of credit of €1,954.40. AIB offer an 8.95% APR rate so a 5 year loan for €10,000 will cost €205.000 per month a total amount repayable of €12,300.
Credit unions
Each credit union sets their own rates but they are usually competitive e.g. Borrowing €10,000 from Carlow Credit Union will cost you €198.01 per month and €11,880.72 in total. In order to borrow from the credit union you need to be a member. You can join your local credit union or in some cases where you work may have a staff credit union.
Geraldine Herbert
10th January, 2018
