Make sure you choose the method of car finance that suits you best
It’s that time of the year again when people are considering changing their car, and if you are considering doing it this month or later on, you will need to know two things.
1) Where can you get the cheapest money should you need to borrow funds and;
2) What type of loan should you take out
Let me start by comparing what the various providers were offering. Earlier this week I called a number of financial institutions and advised them that I was buying a new car. I wanted to find out what my repayments would be based on borrowing €10,000 over a four- year term. I was quoted by each as follows:
KBC - €235 pm (6.30% APR); Credit Union - €235.23 pm (6.50% APR); BOI - €240.86 pm (7.50% APR); AIB - €243.60 (8.45% APR); Ulster Bank - €244.92 pm (8.50% APR); PTSB - €247.90 (8.80% APR)
Each of the above will have different rates based on the age of the car, the type of loan you take out, the type of car, whether the rate is fixed or variable etc. So it’s important to discuss these factors, as the rates I was quoted above may in fact be lower or indeed higher.
Of course you don’t have to arrange your finance through a bank, you can also get access to funds arranged by the dealership you buy the car from, usually through a line of credit arranged and funded by the particular brand of car you are buying. The rates they offer may be lower than the above quotes. Many even offer 0% finance, especially at this time of year.
So in some situations it pays to use the garages financing package – but be careful. Some of the garages make more from selling finance than they make on selling the actual car, so before you sign or commit to anything, compare what they are offering against your bank and make sure it is the best deal you can get.
The next most important area you need to consider is what type of loan you take out. This is as important, if not more so, than the monthly cost. Your options are as follows:
You typically take out this type of loan with repayment terms ranging from three to five years. If you finance the car this way, you immediately become the owner of the vehicle which is not the case if you were to finance it in the 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 i.e. you don’t have a limit on the amount of miles you can or can’t drive etc.
A lease arrangement will suit people who want to change their car every three or four years and are happy knowing that they will never own the car themselves.
Repayment terms are similar to personal loans i.e. somewhere between three and five years and a lease will typically 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. You are responsible for the maintenance of the car during the lease term, and the terms of your lease agreement could impose an annual mileage limit. So, the more miles you travel, the higher your monthly lease repayment will become.
The repayment term for this type of loan 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.
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 (the consumer) 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 HP 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.
Personal Contract Purchase (PCP)
PCPs are designed to make it more affordable to buy a new car. The contract is typically structured so you pay a deposit and monthly instalments over a fixed term. However, unlike a HP or term loan, the payments are typically lower and at the end of the agreement you have the choice of whether to make that final payment and own the car outright, hand back the keys or trade it in for another car – so it’s very similar to a lease agreement.
The difference however, is that a PCP comes with a guaranteed future value (GFV) for the car your purchase and this is treated as the car’s final payment so you know exactly what it will be worth at the end of the agreement. This final value depends on the predicted annual mileage of the driver so you can adjust the agreed amount to suit your needs.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie