When buying a new car figuring out the best way to finance the deal is crucial writes Geraldine Herbert
Hire Purchase (HP) Finance
With a hire purchase agreement, you pay an initial deposit and pay an agreed amount in monthly repayments and the balance is divided equally over the finance period. Once all the payments have been made you own the car. HP finance agreements range from three to five years. The main difference between using a personal loan and a HP agreement to buy a car is that with a personal loan you borrow money, pay for your car and own it immediately. With a HP agreement, you don’t own the car until you make the last repayment.
What to consider: You are the registered owner of the car for tax and insurance purposes even though you are not the legal owner of the car.
Personal Contract Plan (PCP)
The idea of a PCP is simple: buyers put down a deposit or trade-in their old car, followed by monthly payments made over three years and are given a ‘guaranteed minimum future value’ (GMFV) by the dealer at the outset, which is the amount required to purchase the car outright at the end of the contract. In an ideal situation, the value of the car at the end of the contract will exceed the GMFV and the excess will fund the buyer’s deposit for another new car without having to put any other money towards it.
What to consider: 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.
Bank Loan
The simplest way you can finance the purchase of a new car is by getting a personal loan either from your bank or credit union. You can typically take out this type of loan with repayment terms ranging from three to five years and you can borrow the amount you want to pay for the car or make up any shortfall with savings or your car’s trade-in value.
What to consider: The best way to compare loans is on APR – the annual percentage rate – as essentially this is the real cost of borrowing money because it includes interest and charges. The lower the APR, the better the finance deal.
Geraldine Herbert
21st November 2019
