Consumer advice with Gráinne McGuinness
I am considering buying a car in January and friends have told me that garages now offer a way to buy a brand-new one with quite low monthly payments. I don’t fully understand it, is it a good option? — Ellen Madden, Midleton
The type of finance deal you are referring to is a Personal Contract Plan (PCP); they have become hugely popular in recent years and virtually all car dealerships will have some version on offer for customers.
As with all credit arrangements, whether it is a good deal for you or not depends on whether it suits your individual circumstances — there are pros and cons.
The most obvious plus point is the one you mentioned, the monthly repayments are low in comparison with standard car loans. The deposit may also be low, and include a trade-in for your existing car. And you will do all the paperwork directly with the garage, making it quick and easy to arrange.
There are three elements to a PCP arrangement — the deposit, the repayments, and the Guaranteed Minimum Future Value (GMFV) — which is a balloon payment to be made at the end of the agreement.
The deposit can be cash, your car as a trade-in, or a combination of both, and will normally be for somewhere in the range of 10% to 30% of the car value. The more deposit you pay, the lower your monthly repayments.
When signing the deal, the car dealer provides you with a GMFV — the value of the car at the end of the agreement. When the agreement ends, normally after three years, you will either have to pay that amount to own the car outright, hand the car back, or enter a new agreement.
The repayments you make are to cover the price of the car less both the deposit and the GMFV and so will be much less than a standard loan.
Take for example a family hatchback, the Hyundai i30 with a retail price of €19,745. With a trade-in/deposit of €7,068 and a GMFV set at €7,701, monthly repayments over three years would be €215. This works out at an APR of 6.9% (fixed) and is a much lower payment than you would make if buying the car with a standard loan. A three-year loan for the same amount, with an APR of 7.5%, would have monthly repayments of €612.38.
The most obvious con to PCP deals is that at the end of the deal there is a substantial payment still outstanding, which needs to be paid before you own the car. Yes, you can choose to hand it back but then you are left without a car. If you intend to buy your car and continue to drive it for several years then a more traditional loan may make more sense. However if you regularly change your car then a PCP makes a lot of sense, allowing you to change your vehicle without massive repayments.
There will be a number of conditions attached to your PCP deal. You will generally be required to service the car at a main dealer for the duration of the agreement. You will also agree a maximum mileage that you can accumulate and if you exceed this it could affect the GMFV. This is often charged at a set fee per kilometre over the agreed estimate and could mean that even if you hand the car back you could owe the dealer money.
All PCP deals are not created equally so, unless you are decided on one particular make or model, it is worth comparing the offers from a few different brands as they will differ. The example we used above has a 6.9% APR but there are 0% deals, so look at the overall cost of the credit, as well as other terms and conditions.
The mileage limits are one example of the lack of flexibility of PCP deals. They are most suited to those who have a very clear idea of what their motoring and also their finances are going to look like for the next few years.
Payments, mileage, and servicing are all set at the outset. If your lifestyle, work, and earnings are flexible, this may not be the deal for you. But if you can commit to the schedule you can reap the benefits of a brand-new car — reliability, fuel economy, and comfort — for far less than you might have been expecting.
DEAL OF THE WEEK
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