How to plan your finance route carefully for a new set of wheels
According to the Society of the Irish Motor Industry (SIMI), new car registrations from January to May this year were up more than 26% on last year’s figures. That’s a lot of new cars on the road, and predictions are that the second half of the year should also see an increase.
If you are one of those lucky enough to be thinking about taking the plunge (mmm, lovely new car scent) there are a multitude of finance options available:
CREDIT UNION LOAN:
For many Irish people the local credit union is synonymous with car ownership, particularly for your first car. Armed with the savings book begun with communion money, that loan was the first legal contract many of us signed. Your credit union is still a valid source of car finance but rates can be high. As rates vary branch to branch though, it is vital you ask what APR your own branch offers and compare it with other options.
We checked the websites of six randomly chosen branches around the country. The APR offered varied from 8.3% to 10.4%, a difference that would add up to a considerable amount over the term of your loan.
Some had specific car loan rates, others just offered a standard variable rate. If you are lucky enough to have substantial savings with a credit union, some allow members borrow against funds for a much better rate, as low as 4.6% in one case. But this does then freeze those savings.
BANK LOAN:
The next obvious port of call is to your bank. All the high street banks have a variety of car finance options. Fixed rate loans will generally come with a lower APR than variable rate loans, but you are unable to save money by paying those loans off early.
If your income is variable or you plan on trying to pay off your loan sooner than agreed, a variable rate loan will ensure you aren’t penalised.
Be aware that in most cases the fixed rate options are hire purchase (HP) agreements, and therefore you will not own the car until the final payment is made.
We looked at offerings from AIB, Bank of Ireland, Permanent TSB and Ulster Bank.
The rates offered varied from 7.5% to 10.3%. On a €20,000 loan over five years this adds up to a difference of more than €1,200, so it is important to shop around. You can check each bank’s website for its most up-to-date rates and a loan calculator to estimate your repayments.
PCPs:
Another method of finance that is growing in popularity among Irish drivers is personal contract plans (PCPs) between the motorist and the car dealership. These can initially seem bewildering but, particularly if you change your car regularly and like driving a new car, they can make sense.
PCP is similar to a HP agreement, with an option to buy the car outright or roll over into a fresh agreement for a newer car at the end of the agreement – normally a three-year cycle. You pay a deposit, either cash or a trade-in or a combination of both, when you enter the agreement.
At that time, the dealer provides you with a guaranteed minimum future value (GMFV) – the value they will put on the car at the end of the agreement. Your monthly payments will be made up of the difference between what you owe them after your deposit and that GMFV. Therefore the monthly repayments will be far less than a traditional loan or HP.
After the three years, you can hand back the keys and walk away owing nothing further, but you will be left without a car! Realistically, motorists have two options. Either pay the dealer the GMFV and keep the car, or use the car as a deposit for another agreement and start the cycle again.
If you are planning to drive your new car for the next 10 years, this may not make sense, as you will still have that final payment at the end of the agreement. But if you regularly change your car, then PCPs may be an attractive option with low monthly repayments.
Take for example, one of Ireland’s most popular SUVs, the Hyundai IX35, with an on-the-road price of €25,885. With a trade-in/deposit of €8,695 and a GMFVset at €11,471, monthly repayments over three years would be €239.
This works out at an APR of 6.9% and is a much lower payment than a motorist would pay for the same car loan or HP. A three year loan at 8.5% for the same amount ( same trade-in) would have repayments of €540.15. But then you would own the vehicle outright at the end of the loan.
It is important to be aware there are conditions attached to the GMFV, such as keeping the car serviced at a main dealer and sticking to agreed mileage. Also, don’t forget you will have to pay another deposit for the new agreement, unless the market value of the first car is high enough to cover the GMFV and deposit.
As all the motor brands offer different versions of PCP, it is imperative to read these agreements thoroughly before signing up, including understanding the terms and conditions.
They may well be an affordable way of buying a new car on a month-to-month basis, but you need to be fully aware at the outset of what the final outcome will be.
