Drivers showing off new registrations may be flash, but the chances are they are tied into paying off an expensive, spur-of-the-moment credit deal, writes Laura Slattery

For drivers of the kind of "gets you from A to B" cars that Top Gear presenters would readily sneer at, catching a glimpse of shiny 04-plates in the rearview mirror can be difficult to bear.

But before the sight prompts a seething attack of road envy, motorists should remember that somewhere between two-thirds and 90 per cent of cars in Ireland are purchased with the help of some kind of finance plan or loan.

So while drivers eager to show off their new registrations in January might seem annoyingly flash, the chances are they will have tied themselves into paying off an expensive, spur-of-the-moment credit deal.

The car finance industry is split between straightforward unsecured motor loans from a bank or credit union and the range of finance plans sold by car dealers on behalf of a finance company such as GE Capital Woodchester, Bank of Scotland's subsidiary BOS Ireland Motor and Permanent TSB.

According to a survey of 1,834 online readers of Car Buyers Guide by W5 Marketing Intelligence, seven out of 10 consumers purchase their car on the forecourts and are thus likely to be offered easy, quick, while-you-wait credit deals.

These include hire purchase (HP) agreements, a variant of HP known as personal contract purchase (PCP) and leasing.

Interest rates vary, with garages often promoting special low-interest offers linked to a particular make and model of car.

"Forecourt finance" can be cheap, but it can be a rip-off too. As garage owners make commission on finance deals, they will naturally be keen to stress their pros rather than their cons.

In the past, car buyers seduced by the prospect of low repayments have opted for deals that bury details such as balloon payments, buy-out charges, administration fees in the small print, all increasing the total cost of the credit.

Buyers have sometimes found that the balloon payment due at the end of the term is greater than the depreciated value of the car.

Consumers should be wary about signing credit agreements where there is a massive balloon payment at the end, Mr Gary Ellison of AIB Car Finance and Leasing believes.

"You might walk into a garage and say 'I want to buy that car and I want the repayments to be only X amount', so the garage can set it up so there is one big payment at the end, say €10,000.

"So what you are doing really is hedging your bets that the car will be worth €10,000 in five years," Mr Ellison explains.

"You have be very careful with that. As we have seen in the last few years, the second-hand market has been in decline. A lot of people found themselves stuck when they went back to the garage and said "you told me it would be worth this much" but the salesman has said "the market has changed, it's only worth half that now"."

According to GE Capital Woodchester, the fact that the dealer is making a margin from the finance and the sale of the car means they may be in a better position to negotiate on the sale price of the vehicle if customers sign up to their finance offer too.

Reduced rate or 0 per cent finance deals cannot be obtained from high street banks, GE points out.

It is possible to negotiate good deals on the forecourt, agrees Mr Chris Hanlon, managing director of Permanent TSB Finance, which sells its Motor Plan car loan through branches and also provides the finance for point-of-sale garage deals.

For example, a HP deal at 3.5 per cent APR is currently available on Fiat Panda cars, while 0 per cent finance for two years is available on Rover cars.

"It's not for everybody," Mr Hanlon admits. "It's designed for the guy who has a fairly good trade-in, worth about €5,000."

Drivers without the security of a good trade-in or who still owe borrowings on their existing car may not be offered the quick 0 per cent finance deal, he says.

Permanent TSB's advice is to shop around.

"There will be some customers who will not discuss their finances with the garage and will only deal with their own bank. Then there are other customers who like the convenience of a forecourt deal," Mr Hanlon adds.

One disadvantage to hire purchase and PCP is that drivers do not own their car until the final payment is handed over.

Loans are "more transparent", according to Mr Dave Matthews, business unit manager at the Irish League of Credit Unions (ILCU). A fifth of all credit union loans are for cars, he says.

"You know what you're paying each month, you don't have a lump sum at the beginning or at the end and you own the car from day one," he says.

As it steers clear of the forecourt and concentrates on pushing its motor loan, Bank of Ireland argues that cash in hand from an unsecured personal loan gives the customer bargaining power when they approach a garage.

AIB promotes a similar message, with the line "sort out your car finance first and get things moving" currently popping up on its ATM screens.

AIB offers secured HP agreements similar to those available at garages as well as its unsecured car loan product.

Consumers should check how many months are included in a three, four or five-year repayment term, says Mr Ellison.

"Some banks and finance houses say there will be 49 payments in a four-year deal. It's only over by an extra month, but it will make your monthly repayments seem lower compared to 48-month loans."

By law there is a nominal buy-out charge of €12.10 on HP deals, however some financial institutions will charge extra, demanding one month's rental or higher.

Mr Hanlon at Permanent TSB defends the use of hire purchase for speedy car sales.

"The biggest problem in our industry is fraud and when that happens we like to get the car back as quickly as possible.

"Hire purchase allows us to do that. But once someone has made a third of the payments, we can't get a repossession without a court order."

Repossessions are only made "in a very bad situation", he adds.

The forecourt finance market accounts for 30-40 per cent of the overall car finance sector, estimates one of the main providers, GE Capital Woodchester.

"We predict strong growth in new car sales and increasing competition in car finance in 2004," says Mr Paul Murphy, national sales director of its Auto Finance division.

Mr Frank Donnellan, joint managing director of BOS Ireland Motor, agrees. He believes a rapidly increasing number of cars will be financed at point-of-sale as credit-dependent drivers veer away from traditional lenders.

In any case, with car finance providers estimating new car sales of 145,000-155,000 in 2004, it seems as if the sector is once again gearing up to be a money-spinner at both ends of the market.