John Hearne gets behind the small print in car loans, hire purchase agreements, PCPs and your other car purchasing options.
Buying a car? While most of us will put a great deal of time and effort into finding the right set of wheels, we tend to skimp on research when it comes to financing that purchase. In fact, research from the Competition and Consumer Protection Commission (CCPC) suggests we spend four and a half times longer choosing a car than finding the best way to pay for it.
When you consider the size of the purchase, how you pay will continue to have a bearing on your financial health for several years. So choose wisely.
The first thing to do is take some time to review your financial situation to work out how much you can afford. Consider both the upfront cost of a deposit (and whether you have a car to trade in), how much you can afford in monthly repayments and the ongoing running costs; insurance, tax, servicing and fuel. Next, ask yourself whether you want to own a car from the beginning. With many car finance agreements you don’t own the car until the end of the agreement. With some, you don’t ever become the owner.
It’s also vital that you look at the total cost of the finance and not just the monthly repayments. Find out about any additional payments you may be liable for (admin fees, set up fees) and whether there’s an amount you have to pay at the end to become the legal owner of the car.
To state the obvious, the best way to finance a car is with existing savings. If that luxury is unavailable to you, you’ve got three choices. Car loan, hire purchase or PCP (personal contract plan).
With a car loan, you make an application to a bank or credit union to borrow some or all of the cost of the car. If you are approved, you can use the money to buy the car and you own the vehicle immediately.
As with any loan, you need to be aware that if you miss repayments, your credit rating could be affected. Also, the car may be repossessed if the loan is secured on it.
Car loans tend to have higher interest rates than other forms of car finance and they can take longer to organise than arranging finance through a garage. Be aware too that if you are comparing monthly repayments for a car loan versus other types of finance, you may not be comparing like with like.
With a hire purchase agreement, you hire the car, pay an agreed amount in monthly repayments, and become the legal owner of the car at the end of the agreement. During that agreement, the legal owner of the car is the finance company that gave you the money to buy it. You can’t sell the car without their permission.
Hire purchase is usually quick and easy to arrange. A deposit is required and the remainder of the cost is spread out evenly over the finance period, usually 3-5 years. You don’t own the car until the final payment is made and, again, your credit rating could be affected if you miss a repayment.
PCP finance has become one of the most popular forms of car finance in the last few years. It’s the favoured method of purchase for one third of new cars and a growing portion of second-hand ones.
PCPs usually involve low monthly repayments and a relatively quick approval process on the garage forecourt.
The big distinguishing characteristic of the PCP is that a large part of the cost is deferred until the end of the agreement. This means that monthly repayments are lower than they would be using a traditional loan or hire purchase.
Don’t focus on this to the exclusion of all else. It’s easy to be seduced by the apparent affordability of a PCP, but do yourself a favour and consider the full price of the car — including running costs.
Also, take the time to think about what you will do with the car at the end of the agreement.
The complicating feature of PCPs is that at the end of the agreement, you have three options. Pay the Guaranteed Minimum Future Value (the lump sum at the end), hand back the keys or start a new PCP agreement for another car.
If you intend to buy the car outright at the end, you may need to save up the lump sum. If you want to trade-in the car, you will need to keep within certain mileage limits and ensure the car is maintained to agreed standards.
Adhering to these is also important if you plan on starting another PCP at the end of the agreement. It’s also important to know that you may not be able to end your contract early should your circumstances change.
Unlike paying for a car with a loan from a bank or a credit union, you don’t own the car unless you pay the lump sum at the end of the agreement. You cannot therefore sell the car without the permission of the finance company.
At the end of a PCP, if you intend trading in your car for a newer model, you will need to pay a deposit for your new car.
If, at the end of the agreement, the Guaranteed Minimum Future Value is lower than the market value of the car, this means that you have equity in the car which can be used as a deposit for a new one. However, factors such as the condition of the car or changes in the second-hand car market can impact the market value.
Don’t assume you’ll have sufficient equity to cover a deposit, unless the finance company has a guarantee written into the agreement.
Like any credit agreement, your PCP finance will appear on your credit history. This means that if you apply for a mortgage or any other type of credit, the value of the full PCP will be taken into account when lenders are assessing your application. And like any credit agreement, if you miss payments on your PCP, that will be recorded on your credit history which may impact on your ability to borrow in the future.
Áine Carroll is Director of Communications and Policy in the CCPC and she points out that PCPs are significant long-term financial commitments.
“Our recent report into the market showed that the average PCP agreement in 2016 was valued at €25,000. The complexity of PCP products, coupled with the value of these agreements, means that it is extremely important that consumers are able to understand what they are signing up to.
"This can only happen when consumers understand their options and how the product works. Our campaign helps consumers in this regard and makes it easier to understand PCP agreements and to choose a financial agreement that is right for their circumstances.”