I get asked quite often, when people are changing their car, what options are open to them to finance their new purchase and which suits them best so I am going to try demystify the various methods of borrowing money when you buy a new or used car.
The first way you can finance the purchase of a new car is by simply getting a personal loan either from your bank or credit union.
You can typically take out this type of loan with repayment terms ranging from three to five years and even in some cases you can go as long as seven.
The interest is charged to the amount you borrow from day 1 so your weekly or monthly repayments are based on the amount borrowed along with the cost of this loan, spread out over the term you choose.
For example, you borrow €10,000 and the interest over 3 years is €1,500, then your monthly repayment will be €319.44 (€11,500/36)
If you finance the purchase of a car this way, you immediately become the owner of the vehicle which is not the case if you were to finance it in the two other ways I am about to show you, so you have much more control for example over the type of insurance you take out, how you maintain the car, you don’t have a limit on the amount of miles you can or can’t drive etc.
The second way you can finance a car purchase is through a lease and this really suits people if they want to change their car every three or four years and are happy knowing that they will never own the car themselves.
The monthly repayments can be cheaper than a personal loan and I am told it could be easier to get approved than trying to get a personal loan. If this is in fact the case then why don’t we all lease?
Let’s look then at leasing in a little bit more detail.
Repayment terms are similar to personal loans i.e. somewhere between three and five years. A lease typically will have what is called a “balloon” repayment at the end of the loan term which is an option that in return for a lump sum repayment, you own the car outright. Or, of course you simply return the car.
When you lease, comprehensive insurance is compulsory. And just some other things to bear in mind that you are responsible for is the maintenance of the car during the lease term, and the terms of your lease agreement could impose a limit on the number of miles you are allowed to travel each year.
So, the more miles you travel, the higher your monthly lease repayment will become.
The difference between a loan and a lease isn’t down to the difference in monthly repayments between the two it’s more a lifestyle decision.
Leasing a car suits people who like cars and want to drive a new one every few years and because the repayments might be cheaper than a loan, they are able to drive “nicer cars” than they could afford to buy outright.
The third way is through Hire Purchase.
The repayment term is the same as a loan or a lease but the big characteristic with this type of loan is that the car does not become yours until you make that very last monthly repayment so you are effectively hiring the car in the interim until you make that last payment.
Then and only then does the ownership of the car becomes yours outright. You, therefore do not have the option of selling the car and using the money to pay off the balance on your agreement
Similar to a loan, the interest charged is capitalised to the amount you borrow from the outset and like a lease, you have to take out comprehensive car insurance.
The interesting characteristic about a hire purchase agreement is that you can return the car and terminate your HP agreement using what is known as the “half rule”.
When you take out a HP loan, an agreement is drawn up between you and the owner (the finance company) and contained within the Credit Consumer Act of 1995, gives you the right to end the agreement at any time by you giving the finance company notice in writing that this is your intention.
When you sign the loan agreement, the finance company legally must show you the figure for what half the hire purchase of the car is. So, when you have paid half the hire purchase price, you are entitled to return the car to the lender and not be liable for any further payments or suffer any damage to your credit rating (If only the half rule applied to mortgages!)
If you are in a situation where you no longer want or need your car or you simply cannot afford the monthly repayments any longer, then get out your loan agreement, or if you can’t find it, request it from the finance company. Look at the hire purchase amount and then divide it in two and if you have repaid at least that amount, then you qualify under the half rule. I suspect that there are thousands of people struggling to make car loan repayments who are unaware that this rule may actually apply to them, and you know it could end up saving them thousands of Euros and help with their monthly cash flow.
The key thing when you are borrowing money for whatever purpose is to understand what you are undertaking from the outset, rather than finding out later when it is too late to do anything about it, and you discover that you made the wrong decision.
“If I had my time all over again, I would have done things differently” is something I hear all too frequently, so please don’t let that happen to you. Consider all of your options and then decide which is best for you and this applies in no better scenario than when you are buying a car.