New car sales are a good barometer of a country’s economic health. For Ireland the deeply depressed market here over the last few years says it all. Consumers simply haven’t had the money to change their
cars. But with tiny, tiny green shoots of recovery appearing, people’s thoughts are turning to replacing their vehicles. Dealers say showroom traffic so far this year is significantly up on 2013.
It is always enjoyable to ogle new metal on the forecourt and to have a long wish list of desirable equipment and features. But all of this costs, and for most people buying a new car means borrowing money. If your heart is set on a Ferrari F12, the best advice is to buy a fistful of Lotto tickets and hope for the best. But if your motoring needs will be satisfied by something a little less exotic there are a number of ways to finance your purchase.
Cash buyers
If you have a shoebox full of cash to splash you are in the best position possible when it comes to driving a hard bargain. Shop around to see who will give you the best possible terms. If the dealer is not willing to play ball on the price push for other perks, such as free road tax, free servicing, or a discount on an optional equipment package. However, if you are willing to look at a low mileage demo or a pre-registered model sitting on the forecourt, you could do very well indeed. One tip for cash buyers. If you aren’t used to haggling – or simply feel uncomfortable doing it – find a friend who actually relishes the challenge. Flattered to be asked, such friends will want to show you just how good they really are.
Car loan
At one time most people financed their new car with a bank, building society or credit union loan. Finance is still on offer from these sources, although not as accessible as it used to be. Check out availability and rates before committing yourself.
The typical loan period is between one and five years. A key advantage of a straightforward loan is that there is no up front deposit required and you can normally pay the loan off early without incurring a penalty. If you think it’s possible that additional funds may become available to you before the end of the term, make sure your lender will permit this without penalty. One drawback of the traditional loan is that you are exposed to interest rate fluctuations. That means your repayments might go down if interest rates fall, but up if rates rise. The outlook at present is for rates to remain flat for the next little while or to edge upwards. There is no realistic prospect of them going down. If interest rates go up you may find yourself having to make additional payments at the end of the loan period. Bear in mind that main advantage of a loan is that you can sell the car to repay the loan should you find yourself unable to keep up the repayments. You can’t do this with most other forms of finance and if you run into difficulty the vehicle may be repossessed. If your circumstances change, talk to your lender and see if it’s possible to restructure the deal. You do not want to end up with the car being sold off at a low price leaving you with no transport and burdened by a large outstanding balance.
Contract hire
This is basically car hire over a fixed term for a fixed monthly amount so your motoring costs are predictable. At the end of the hire period, however, you do not own the car. You simply get the use of it for the agreed period and then hand it back. Contract hire is generally more suited to the business user. It means that the leasing company takes all the risk in respect of the residual value at the end of the lease period and you are not tying up precious working or investment capital in a depreciating asset. If you want hassle-free motoring you can pay an additional fee to the leasing company to take care of servicing and maintenance. The downside is that you will almost certainly incur additional costs should you exceed the agreed mileage or incur any damage on the vehicle.
Lease
Leases are generally taken out on vehicles costing in excess of €10,000 and the typical lease period is two to five years. Again, you do not own the vehicle at the end of the lease period. It is owned by the leasing company and you are being charged for its use. The interest rate is fixed for the term of the agreement.
Hire Purchase
When you use a hire purchase agreement to buy a car, the dealer you are “buying” from actually sells the car to a finance company, which then rents the car to you for an agreed period. At the end of the agreement, which can typically run from between two and five years, provided you have made all the repayments, ownership passes to the “hirer”.
HP is not particularly flexible. The interest rate is fixed for the term of the agreement and it is not usually possible to increase the monthly repayments if you want to reduce the term. If you want to extend the term you will usually be hit with a rescheduling fee. If you come into money and want to pay off the entire amount due you may be entitled to a rebate of interest, but it is unlikely that you would save as much as you would were you to pay off a standard loan.
PCP (Personal Contract Plan)
PCP is by far the biggest type of finance available in the new car market today. It was used to finance about three quarters of all car sales in the UK last year, and in the space of two years it has become ubiquitous here. Most brands here now offer a PCP although they all have different names for them such as Toyota Flex and Honda Now.
It’s a highly flexible form of hire purchase. The customer pays a deposit for a new car and then a monthly sum over a fixed term, usually three years, which covers interest and depreciation. But unlike hire purchase, customers are not committed to buying the car at the end of the contract and unlike leasing, which is really a rental agreement; they have “equity” in the car. This means the customer can buy it outright by paying a guaranteed minimum future value (GMFV) set at the start of the term. In practice, what usually happens is that the customer uses the equity in their car as a deposit and starts another three-year deal with the same dealer. Manufacturers are enthusiastic about PCPs because it incentivises car buyers and gets them into a frame of mind to replace their car every three years with the same brand. Dealers love it because it encourages repeat business and consumers appear unconcerned about whether or not they fully own the car.
While similar in principle to HP, instead of paying off the entire value of the car in monthly installments, you are effectively only paying off the depreciation. At the end of the term there will be a single larger payment to make, which can be dealt with in a variety of ways. What you do will depend on whether or not you want to keep your car or change it. Compared to an HP agreement the monthly payment, initial deposit or repayment term may be lower. For many people, that is the big attraction. The initial deposit can usually be up to a maximum of 30 percent of the value of the new car. The term can be as short as 18 months or as long as 48 months, although most are offered at 36 or sometimes 37 months.
When you take out a PCP the finance company guarantees that, subject to certain conditions such as maximum permitted mileage, the value of your car at the end of the contract term will be at least the same as the amount outstanding. That means you can simply hand the car back at the end of the term without any further payments being due. If the actual market value of the car at that time is less than the amount outstanding that’s the finance company’s problem, not yours. Normally this guaranteed value is set reasonably low to give the lender some protection. A side effect of this, however, is
that in practice the car will actually be worth more than the amount outstanding. This excess represents equity that can be used as part of the deposit on the replacement new car – an inducement to PCP customers to go again.
Manufacturers and dealers have flocked to PCPs which really do appear to convert the pain of a new car price tag into easy monthly installments. But buyers need to be sure they fully understand what they are entering into and how much they are paying in interest and fees and they need to be certain they are not over-stretching themselves. Contrary to the belief held by some, if a buyer decides to walk away from a PCP it is very likely that a financial penalty will be imposed. PCPs are not transferable.
The big negative with most PCPs is the emphasis the providers place on repayments per month. These are all based on assumptions about the amount of deposit, which can be substantial, and the lump sum outstanding at the end. Make sure you compare the underlying Annual Percent Rate (APR) of interest being charged.
Aidan Doyle, head of marketing & PR at Kia Motors Ireland, has some words of caution. Kia offers a PCP in conjunction with Bank of Ireland and advises customers to log on to its calculator to help them to decide what product – HP or PCP – is best for them. Other manufacturers have similar tools, he says. “We would, however, caution against using so-called ‘switching calculators’ that bundle estimated running costs, depreciation and repayments and purport to calculate the ‘savings’ to be achieved by switching between brands,” Doyle says. If you intend to change your car at the end of the term a PCP can be highly cost effective. But if you are uncertain just how long you may want to keep it, and especially if you think you might hold onto it for five or more years, then an HP agreement or even a straightforward loan may well be the better option.
