See all Motoring AdviceIf you’re looking to treat yourself to a new set of wheels, the easiest and most straightforward way to do it is to buy the vehicle outright for cash. But as that will take tens of thousands of euros, in most instances, then it’s not always practicable – so here are the many ways of financing a new car.
Personal loan
The first thing you can do is go to a bank to get a loan for the amount you wish to spend on a car, or at least to cover the larger portion of it if you have some savings to put down as a deposit. Most lenders in Ireland will provide up to €75,000, which covers most new cars save for the most exotic and/or polluting ones, although bear in mind many places will only offer €50,000. These will also need to be paid back in full in anything between one and five years, although some lenders – such as credit unions – will allow up to ten years.
Interest rates can be typically about 6.8-8.95 per cent from a bank, while a credit union can only charge a maximum annual percentage rate (APR) of 12.68 per cent, which means you need to think very carefully about borrowing a large sum from any lender like this as you will be paying back more than you borrow – a €50,000 loan at even a lowly 6.8- or 6.9 per cent APR will mean you have to pay back around €55,000 over the course of three years. That will lead to high monthly repayments, too, so the less you have to borrow, the better.
Having said that, one of the benefits of buying a new car with a personal loan is that, in the eyes of the law, you will own the car outright the minute you purchase it with the loan funds, as it’s an unsecured loan (you borrow the money without offering up any of your assets to secure it). However, if you struggle to make the monthly repayments and the bank or credit union take legal action against you to recover its money, you’ll almost certainly end up having to sell the car to repay the debt.
Personal Contract Plan (PCP)
The most common type of new-car financing is the PCP. As part of it, what you’re financing is the depreciation of a new car. What we mean by this is that you place a deposit on the car you want, then the lender – indirectly, this will be the dealer you are buying from as they handle PCP themselves, using an agreed finance company of their choosing or one of the car makers’ own banks – gives you a guaranteed minimum future value (GMFV) of the car at the end of your agreed repayment period.
So, let’s say, for instance, that you want to buy a €50,000 car. You put a €5,000 deposit on it (ten per cent though most people put down more than that) and tell the dealer you want the car for 36 months, with an maximum mileage rate of 10,000km per annum. The dealer then gives you a GMFV based on what the market predicts that spec and type of car will be worth when it’s three years old and has 30,000km on the clock; let’s say, for simplicity’s sake, that the GMFV in this instance would be €25,000. That means the amount you are financing in this theoretical PCP is €20,000 – that’s €50,000 minus your €5,000 deposit, then minus the €25,000 the car is worth at the end. There will be an APR on this portion of it, of course, but again these can be low, usually well below 10 per cent in all cases and some as low as zero per cent if you seek them out.
The main benefit of this scheme is that you get much lower monthly repayments because you’re financing a much lower amount for the car, but the flipside of that is that you never actually own the vehicle – unless you pay a large balloon payment (which will be the GMFV) at the end of your term. Most people who use PCP finance do not do this, instead handing the car back at the end of the agreement and using whatever equity might be in it as a deposit on another new car from the same manufacturer (or even a rival car company). You’d build up equity in this case if, for instance, you didn’t do 10,000km per annum and the car was only showing 15,000- or 20,000km at the end of your agreement, or the GMFV underestimated the value of the car for any other reason.
PCPs are the manufacturers’ way of trying to encourage brand loyalty, as it makes renewing your car every three years (the most common PCP agreement deal length, but other terms are available) a simpler process, although be warned there can be extra charges at the end of a PCP term if the car is showing damage, or you have exceeded your agreed total mileage rate which you took out at the start of the finance.
Hire Purchase (HP)
This is a method of buying a car on finance where the loan is secured against the car itself, unlike a personal loan. You have to pay a deposit, typically around ten per cent, and then there will be fixed monthly payments over your agreed time period, which is normally between one and five years. HP deals are usually sorted through the car dealerships themselves, as it’s one of their preferred forms of finance, and so you can often get competitive APR rates – something like 5.9 per cent is not out of the question, or sometimes even lower if there’s a deal on.
The plus point of HP is that you’re funding the entire purchase value of the car, with interest on top, but spread out over a number of years so that you don’t have to find tens of thousands of euros of your own money up front. However, legally you won’t own the car until you make the final payment at the end of your term and if you fail to keep up with payments, in this instance the lender can repossess the car in such circumstances. One good thing here: you’re not totally tied into a HP contract for the duration, as once you’ve paid over 50 per cent of the vehicle’s cost, you can return it with no further payments required if you no longer want or need the car. But you need to check the paperwork of any HP agreement to see if this will be the case, and the car would need to be in good condition when you hand it back. There are, however, no mileage rates involved with HP, because – in the normal course of things – you’ll complete the purchase at the end of your agreement and then it doesn’t matter to the car company how many kilometres your vehicle has on the clock one way or another.
Leasing/Personal Contract Hire (PCH)
This is an affordable and easy way of getting into a new car, but you must go into it with your eyes open that you will never own the vehicle – unlike PCP and HP, with PCH there is never any option to purchase the car at the end of the agreed deal period (usually 12 to 48 months). The clue is in the name: ‘hire’. You’re paying less because you’re basically borrowing a car long-term.
There are other benefits, too, such as the fact that servicing and maintenance packages are often thrown in on these deals, so if you can stomach monthly costs similar to or even marginally in excess of a PCP deal, it could still work out cheaper because your payments may include any costs incurred for service and maintenance while you’ve got the car.
Be warned, leasing/PCH usually involves an initial payment, which will be a few months’ worth of your regular payments bundled together, and there will be strict mileage and condition terms which mean the car must be in tip-top condition when you hand it back (fair wear and tear is allowed), or you’ll pay penalties.