New car sales may be on the decline but, for those who do intend to purchase over the coming year, figuring out how to finance the deal is crucial. If you’re in the market for a 192 model, or even a second-hand 2016 or 2018 car, what do you need to know about your various financing options before you take the plunge?
Cash
The cheapest way to pay for a car, be it new or otherwise, is to pay for it from your own funds. Historically, this may have been less attractive for some people, given that it means giving up a portion of their savings which they may rather hold onto for reasons of financial security and that all-important “rainy day” fund. These days however, the opportunity cost of putting your money into your car is less obvious; after all, the “real” value of your money is likely falling if you’re only earning a return of about 0.1-0.3 per cent on it on deposit. So paying for a car with your deposits can make sense.
Total cost:
– Toyota Corolla hatchback hybrid Aura: €27,370
– VW Golf: €22,495
Credit union loan
The upside when buying a car with a credit union loan, be it brand new or second-hand, is that you will own the car straight away. So, should you run into financial difficulties, get fed up with the car, or are planning a move abroad, you will be able to sell the car, pay off your loan and move on with your life.
Repayment of such loans also typically tends to be flexible, which means that you will also be able to make overpayments on the loan, should your finances allow, or repay the entire loan early, without penalty. Doing so helps save on interest costs.
In addition, when you borrow through a credit union, you get loan protection on the borrowings. This means that, should you die while the loan is outstanding, it will be repaid by this protection policy, and won’t pass to your estate.
The downside perhaps, 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 PCP deal for example. In addition, depending on how often your credit union's credit committee meets, you might find that it can take a bit longer to secure finance than other means.
You can expect to pay about 8-10 per cent APR for a credit union loan. Capital Credit Union, for example, offers car loans from €3,000 to €40,000 at a rate of 8.2 per cent APR, and terms of up to seven years, as well as 100 per cent finance.
Blanchardstown Credit Union is offering car loans at 9.33 per cent APR, while Mullingar Credit Union, which readers might recognise from the RTÉ programme the Borrowers, has a typical APR of 8.2 per cent.
Total cost:
100 per cent finance over three years @ 8.2 per cent
– Toyota Corolla hatchback hybrid Aura: €30,967
– VW Golf: €25,451
Hire purchase
Buying a car on hire purchase is typically offered by the main banks as well as by forecourt finance providers. In essence, a HP arrangement means you don’t actually own the car until you make your final payment.
A key advantage of such an arrangement is its speed. You can typically arrange it at the same time as buying your car from a garage: alternatively, you can seek the credit from one of the main banks.
Another advantage is that its structure may mean that you will have lower monthly repayments, when compared with a traditional or credit union car loan. That can make the loan more affordable over most of its term. However, this means you will also have a balloon payment at the end of the loan.
It is important that you understand fully how a HP structure works before agreeing to one. As the name implies, HP means you “hire” the car from the finance provider; so, despite making hefty monthly repayments, you won’t actually own the car until the very last payment is made.
HP arrangements are typically less flexible than a car loan. If you fall behind on repayments for example, the finance provider can seize the car, leaving you short of all the payments you’ve made to that point. And remember, this can happen right up until your very last payment.
And if you’ve agreed to a balloon payment, but can’t find the funds to finance this at the end of the loan, again you will lose the car and all the repayments you’ve made until that date without recourse.
You should also be aware of what’s known as the “half rule”. This means that once you’ve paid half the price of the finance agreement, you can end your agreement at any time and give back the car; but if you’ve paid more than half of the value of the agreement, don’t expect a refund on this balance.
While you may be able to repay the loan early, doing so won’t save you as much in interest as it would do with a credit union loan, for example. This is because it is up to the finance provider to decide on how much of an “interest rebate” to give you.
Remember, HP deals also come with a variety of fees and charges, which can increase the total cost of finance. At AIB for example, you'll pay an APR of 8.45 per cent, as well as other charges such as a documentation fee (€63.49) and a purchase fee (€12.70).
Total cost: 100 per cent finance over three years @ 8.45 per cent
– Toyota Corolla hatchback hybrid Aura: €30,906.95
– VW Golf: €25,415.51
PCP - Personal Contract Purchase
They’re quick and easy to arrange, and can be done at the same time as you pick out your new car, while they also allow you to have lower monthly repayments than you might have with other forms of finance. That can make a new car purchase look more affordable.
In addition, if you’re a fan of having a new car, they can help you keep rolling over to a new car every three years.
These are just some of the reasons behind the explosion of PCP, or personal contract plan, finance in Ireland. Figures from the Central Bank show that the market was worth some €1.4 billion as of the end of 2017, with 76,582 such contracts taken out by Irish households. On average, 30,000 PCPs are now taken out every year, compared to 400 in 2012, although as new car sales slow, so too is the volume of new PCP arrangements.
PCPs now account for about 39 per cent of car-related bank debt, up from 15 per cent at the end of 2014.
But, while PCP finance has its place in car finance options, it is a complex product and it’s important that buyers clearly understand how the finance structure works, and what risks lie within.
First of all, like HP deals, when you sign up for a PCP deal it means that you hire, or lease, your car from the finance provider. Until the final balloon payment is repaid, you won’t be the owner of the car.
PCP deals have three separate financial steps. The first is the deposit or down payment, which is typically between 10 and 30 per cent of the value of the car, according to the Competition and Consumer Protection Commission. Sometimes an existing vehicle which you own can be used for this; other times you'll pay the deposit in cash.
The next step is the monthly repayments. PCP deals generally last for three years, and monthly repayments tend to be lower than other arrangements, because a large portion of the cost of the car is not paid until the end of the agreement.
Finally, there is the GMFV, or guaranteed minimum final value. This balloon payment is set at the start of the agreement, and if you want to own the car outright, you’ll have to stump up for this at the end of the agreement.
At the end of the contract, people have three options:
1) Pay off the GMFV and own the car;
2) Hand the car back and settle any outstanding bills such as that for mileage that might be over the level agreed in the contract, or;
3) Enter into another PCP agreement.
This can make sense if you have positive equity in your contract – i.e. as a result of the GMFV being lower than the actual market value of the car at that stage – by putting this equity as a deposit towards your new car.
PCP deals are less flexible than a personal loan. If you run into difficulties with your repayments for example, and you have paid less than one-third of the PCP price, the finance company can take back your car without a court order. If you have paid more than one-third, the finance company will need a court order to take back the car.
Should the car be repossessed, you won’t be able to walk away from the deal; you’ll still be on the hook for the difference between what the car might have been sold at, and how much you owe.
Another important point to note is what happens if you go over your mileage limit; typically PCPs will have a limit of about 15,000km a year. If you go over this however, you could be looking at a substantial penalty.
Negative equity is also a potential problem. Typically such deals are structured so that the GMFV might be €10,000 for example, but the value of the car is actually €12,000, which leaves equity of €2,000 which can be put straight into a new car PCP deal. PCP providers price their market final values to deliver such an outcome as it encourages customers back into such arrangements.
However, if, at the end of the PCP term, the car in the open market is actually worth less than the GMFV – a valid concern given Brexit and the increase in cheaper used car imports on the back of weaker sterling – the customer may not have equity to roll onto a new deal. They also may also not have enough funds to buy the car outright, or enough of a deposit for a new car.
Total cost:
– Toyota Corolla hatchback hybrid Aura: €30,482.34 (based on deposit of €1,915.90)
– VW Golf: €24,661 (based on 30 per cent deposit of €6,748.50)
