Driving the right deal for you when buying a car
Picking out the vehicle is the simple part, figuring out how to pay for it can prove more tricky. Knowing what you are signing up to is the golden rule, read the fine print and check the maths
Savings
Saving up and buying your car outright with hard cash makes best financial sense as no loan interest is involved.
However, it takes time to save so if you are in need of a car urgently then this may not be an option for you and you will need to get a loan from the bank or avail of a car finance package from a dealer.
With savings you need to make sure that your savings account is getting the best interest there is out there so compare rates as they vary from different providers depending on which savings account you opt for.
The Competition and Consumer Protection Commission (CCPC) website is a good place to start. Click on there and make comparisons. Shop in advance to get the most for your money. You can also open a savings account with your credit union.
Personal loan
The best bit here is you get to own the car while paying off the loan so if you do get into financial difficulties you can sell the car. However, bear in mind that you will be paying interest on the amount borrowed and your credit rating can be affected if you miss repayments.
Locking into a fixed rate so that you know what your payments will be might sound like a good idea but if you wish to pay off or pay down the loan over its term in order to reduce your interest bill, you might find that you incur a hefty penalty.
However it depends on what stage of life you are at — for instance, if you are considering applying for a mortgage be aware an outstanding car loan might affect your chances of a bank approving your application.
This is one reason why hire-purchase agreements can be more attractive to some people. Credit unions offer loans to their members — find information at your local branch, the Irish League of Credit Unions or the Credit Union Development Association.
PCP
Personal Contract Plan or PCP for short, operates with the buyer paying a deposit — or covers it with a trade-in — and then agrees a monthly fee for a set number of years, usually three.
When that period is up, they then decide between paying a lump sum to own the car, giving the car back with no further payments, or using value remaining on the car to cover a deposit on another new vehicle to start the cycle again.
The pros are a shiny new car every three years, minimal maintenance costs and reasonable monthly payments. The cons include the fact that you don’t own the car, there are usually limitations on mileage and condition and once in the cycle it is difficult to get out and start again from scratch.
Unless you have funds to either upgrade or buy the car outright at the end of the term, you may have to hand the car back to the dealer and forego the outgoings you have already made, unless you can agree to a large final payment called ‘guaranteed minimum future value’ (GMFV) or ‘balloon payment’.
These plans usually carry a slightly higher rate of interest.
Hire purchase
Good old Hire Purchase is still available. Rates and repayments are higher than PCP but you own the car at the end.
So while Credit Union and other bank loans allow the buyer to own the car from the start here you get to enjoy the car but you don’t own it until last payment is made.
The good thing is the garage arranges all the finance for you. A hire purchase agreement is often an attractive option for this reason alone.
It saves time and hassle as the garage arranges finance and you don’t have to do all the work visiting and talking with banks or a credit union to arrange a personal loan.
During the boom years, a hire-purchase arrangement may not have been a source of worry for many but given the current economic environment, it can be a risky prospect for those with an uncertain financial future.
It could be a huge worry and stress if you loose your job a year or two down the line and you are unable to keep up with repayments — you loose the car and all the money you have spent on it and you may still be liable for any outstanding debts. Pay close attention to your agreement before signing on the dotted line. If you are in doubt about repaying be careful.
Be careful too of over-zealous car sales people encouraging you to sign up for five years as it may mean lower monthly repayments but in the long term you will end up paying more, which means more money for the financial provider.
If you opt for a personal loan instead of a hire-purchase agreement and subsequently run into trouble, at least you still own the car. This gives you options.
You can sell the car to pay down the outstanding loan or you can ask your borrower to restructure your loan.
With hire purchase the garage acts as an agent or intermediary for a finance company and the garage earns commission to arrange the finance.
The finance company in turn rents the car to you for an agreed period of time in return for monthly repayment over a number of years.
Buying a car is an expensive business so unless you have cash at hand to buy outright make sure you get the right car finance package to suit you and don’t get caught out by the fine print.
Make sure too that the car you are buying is within your means not just in terms of the repayments, but also in terms of the running and maintenance costs and as ever if an offer looks too good to be true it almost certainly is just that — the pain of unexpected depreciation is always there, waiting to sting you so take your time and make the right choices.
