The pandemic slowed car sales. Showrooms were shut and no-one could go anywhere anyway, so why invest in wheels? But as restrictions ease and the 212 registration plate commences, things are starting to ramp up. If you are in the market for a new car, what's the best way to pay for it?
There were 2,767 new car registrations for the month of June: that’s more than double the same month last year when pandemic restrictions dampened spending. Some 63,867 new cars have been registered this year to date. Although that’s 20 per cent down on the same period in 2019, it’s 20 per cent up on last year.
So if you’re buying a new car, you’re not alone, but you could end up spending more for the same car depending on how you pay for it.
Cash
The cheapest way to finance most things is from your own pocket. Maybe you’re among those who clocked up record savings during the pandemic. If you are lucky enough to have €30,000 sitting on deposit, you’ll be earning a measly return hovering around zilch. The money will work harder for you in a pension but, if that’s sorted along with a rainy day fund, more power to you.
But if you are using those hard-earned savings to purchase a new car, a point to note is that a brand new vehicle will lose between 15 and 35 per cent of its value in its first year, and up to 50 per cent over three years, according to carzone.ie.
If you bought a brand-new car for €30,000 and it suffers 50 per cent depreciation after three years and 100,000km, it would be worth €15,000 by the end of that period. That new car smell and those envious looks from the neighbours come at a price.
Personal loan
Buy a car using a personal loan and the car is yours straight away. There are no mileage restrictions, no balloon payments and you can sell it when you want. You do have to pay back the loan back of course.
Being able to pay more than your set monthly repayment sum or pay occasional lump sums off your loan will save on interest
If you're looking for bank finance, Avant Money is offering eligible borrowers €30,000 at a fixed rate of 6.1 per cent APR over five years. So you'll pay back €34,715 in monthly payments of €579. That's €4,715 in interest. A fixed rate loan offers less flexibility, but you will know exactly what your repayments will be every month.
With a variable rate loan, repayments can go up or down, but it can offer more flexibility. A lot can happen in five years. If a new baby arrives, you lose your job, get a bonus or decide to emigrate, having the flexibility to reduce your payments for a time, extend the term or pay the loan off earlier than planned can be helpful.
Being able to pay more than your set monthly repayment sum or pay occasional lump sums off your loan will save on interest and mean that the loan is paid off earlier. Check upfront, however, if there are penalties for this.
A credit union loan is another option. Bray Credit Union, for example, offers motor loans to members at 6.96 per cent APR. Borrow €30,000 over five years, for example, and you'll pay back €591 a month or €35,430 in total, so that's €5,430 in interest.
You’ll need your three most recent payslips, and proof of purchase will be required within six weeks of drawing down the loan. Many credit unions include life insurance with their loans. This means your loan is paid off if you die or become permanently disabled.
The downside with a bank or credit union loan is that the structure means you will be repaying the entire value of the car over the period of the loan. That means your monthly repayments will be higher than they might otherwise be, with a personal contract plan (PCP) deal for example.
Hire purchase
Hire purchase (HP) deals are offered by car dealerships and some banks. Get your car and your loan under the same roof – what's not to like? The clue is in the name.
While the car dealership might refer to it as a “car finance loan”, it’s actually a hire purchase agreement. Unlike a loan, you don’t own the car until you make the final repayment; you’re hiring it.
If you fall behind on repayments, the bank can repossess the car, no matter how much you have already paid
The interest rate on HP agreements varies by lender and is charged at a fixed rate. Your total repayments will comprise the cash price of the vehicle, interest on the borrowed amount and agreement fees. Be sure to ask for a list of additional charges and fees before signing the agreement.
Fees for setting up the agreement, penalties and higher rates of interest for missed payments, completion payments, repossession charges and rescheduling fees all add up.
If you pay off the car early, you may not save as much interest as you might with other forms of credit. Some HP agreements have a balloon payment at the end, which is normally higher than the usual monthly repayments.
You can end the HP agreement at any time, but you will need to pay half the price of the car, if you haven’t done so already. If you fall behind on repayments, the bank can repossess the car, no matter how much you have already paid.
AIB offers a HP agreement where you can borrow €30,000 for a new car over five years at an APR of 8.45 per cent and you'll pay back €611 a month. That adds up to €6,630 in interest plus the €30,000 loan capital over the term.
There’s a documentation fee of €63.50 and final repayment fee of €12.70 as well as fees for early repayment and arrears.
Personal Contract Purchase (PCP)
Many car dealers also offer personal contract plans (PCPs). These typically have lower monthly repayments which are attractive but look out for the small print. The main difference between PCP and hire purchase is that you pay less of the amount owed over the term of the agreement than with HP. But that also means you’ll pay a big chunk at the end.
If you go this route, first you’ll need a deposit that is typically between 10 per cent and 30 per cent of the value of the car. This can be paid in cash, or by trading in your existing vehicle.
PCPs aren't that flexible: repayments are fixed, it will cost to extend the repayment schedule and there may be caps on mileage
Next are the monthly repayments, typically paid over three years. But after those three years of relatively low monthly repayments comes the sting – a final large lump sum payment in order to own the car at the end of the agreement.
This figure is set by the finance company at the outset so it’s not that it comes as a surprise but, inevitably, it is one of those things we put off until it is much more of an immediate issue. You can pay the balloon payment and keep the car or you can enter a new PCP. Alternatively, you could return the car and owe no more – but you’ll have no car to show for it.
PCPs aren’t that flexible: repayments are fixed, it will cost to extend the repayment schedule and there may be caps on mileage with penalties should you exceed them. There can be tricky clauses about wear and tear, and you may be locked into a particular servicing arrangement, preventing you from shopping around garages for the best price.
Unlike a personal loan, you don’t own the car so if you fall on hard times, you can’t readily sell it if you need to. You can end the agreement at any time and give the car back, paying half the price or the difference between what you have already paid and half the PCP price.
If you have paid more than half the price when you hand back the car, you won’t get a refund. (If you are struggling with repayments, the Money Advice and Budgeting Service can support you with a debt action plan).
If you decide to go the PCP route, think ahead and save ahead. At the end of the three years, you will need to be able to pay the final payment or have enough money for a deposit on a new PCP. And so the cycle continues.
If there is any equity in the car, it will not be refunded to you. For example, if the final payment is €10,000 but the car is worth €12,000, you will not be given a refund of €2,000. It’s enough to drive you around the bend.
