Thursday 27 April 2017

Explainer: How to slash €10,500 off your car finance costs

It could cost three times more to borrow for a car from a bank instead of a dealer

By Tom Halliday
By Tom Halliday
Louise McBride

Louise McBride

Car buyers could pay as much as €10,500 more for their car if they borrow the money for it from a bank instead of a car dealer, a survey by the Sunday Independent has found.

So if you're one of the many who heads out to buy a car early in the New Year, choose your car finance carefully. Otherwise, that new set of wheels could cost you thousands - if not tens of thousands - more than if you had got your finance elsewhere.

This paper's survey examined the cost of two of the main types of car finance: car loans, where you buy a car using a bank loan; and hire purchase, where you pay monthly repayments for the hire of a car and don't own it until the final payment is made.

You must usually go to a dealer to get hire purchase - though some banks offer hire purchase as well as car loans. Dealers don't offer car loans.

It could cost as much as three times more to borrow money for your car from a bank than to buy from a dealer, according to our survey. How much cheaper (or not) a dealer is than a bank will depend on the dealer - some dealers offer more expensive car finance than the banks.

In our survey, we examined how much it would cost to borrow €20,000 or €50,000 over five years to buy a car. We checked the car finance deals from the main banks - as well as from a number of well-known car dealers.

Cheapest for €20,000

The cheapest way to borrow €20,000 to buy a car is through a hire purchase deal from Opel, Renault or BMW, according to our survey.

Opel and Renault charge 3.9pc interest on their five-year hire purchase deals, while BMW charges 4.9pc interest. The cost of borrowing €20,000 (including hire purchase interest and fees) over five years comes to €2,009 with Opel, €2,096 with Renault, and €2,532 with BMW.

Volkswagen charges 5.9pc interest on its hire purchase finance, while Nissan's interest rates start at 5.9pc. It costs €3,055 to borrow €20,000 through hire purchase from Volkswagen over five years - and €3,207 with Nissan.

It is possible to arrange hire purchase with AIB, Bank of Ireland (BoI), Ulster Bank (through Lombard Motor Finance), and First Citizen Finance (a company set up and staffed by the team of Permanent TSB Finance) - however, it is more expensive to do so than through the dealers included in our survey.

AIB charges 8.45pc interest on its hire purchase finance, First Citizen charges 7.9pc, BoI 7.3pc, and Ulster Bank 7pc. At these rates, it costs €4,532 to borrow €20,000 under hire purchase with AIB, €4,119 with First Citizen, €3,798 with BoI and €3,617 with Ulster Bank.

All of the banks and dealers in our survey charge hire purchase fees (such as documentation and purchase fees). These fees typically add between €130 and €150 to the cost of the finance, though it varies. The figures quoted in our survey for the cost of borrowing €20,000 under hire purchase include interest and hire purchase fees - and are based on the full €20,000 being borrowed.

Most expensive for €20,000

The most expensive way to borrow €20,000 for a car is through a car loan with AIB or Permanent TSB (PTSB). AIB and PTSB charge about €4,600 interest on a €20,000 car loan - more than twice what it would cost to borrow the money under hire purchase with Opel and Renault. Furthermore, the interest charged by PTSB will be higher if the car is registered more than three years ago because the age of the car determines the interest charged. Should you be borrowing from PTSB to buy a new car, the interest rate is 8.8pc - but that rate rises to 10.4pc if buying a car which was registered in 2010 or 2011. To get a car loan from PTSB, the car must have been registered in 2010 or later - and the car must be bought from a dealer.

Cheapest for €50,000

The cheapest way to borrow €50,000 to buy a car is through hire purchase with Renault and Opel, according to our survey. Both dealers charge 3.9pc interest. It costs €4,841 to borrow €50,000 over five years under Renault's hire purchase deal; €5,022 to borrow it from Opel. (These figures include hire purchase interest and fees and assume that the full €50,000 is being borrowed.)

The other dealers in our survey charged higher interest and so were more expensive. It costs €7,648 to borrow the money under hire purchase with Volkswagen, €7,923 with Nissan and €8,148 with BMW.

The hire purchase finance offered by the banks is more expensive than from dealers. AIB, which charges 8.45pc interest, and First Citizen, which charges 7.9pc interest, were the priciest for hire purchase finance of €50,000. It costs €10,766 to borrow €50,000 under hire purchase with AIB over five years, and €10,297 with First Citizen. BoI charges 7.3pc interest on its hire purchase; Ulster Bank charges 7pc.

Most expensive for €50,000

Our survey found that the most expensive way to borrow €50,000 for a car is through a personal loan with Ulster Bank. Ulster Bank charges 12.5pc interest on a personal loan of €50,000 - which would clock up an interest bill of €15,310.59 over five years. That's about €10,469 more than you'd pay if you borrowed the money under a hire purchase agreement with Renault. It's also three times the cost of the hire purchase finance offered by Opel.

AIB is the second most expensive for bank loans, charging 8.95pc interest - or €11,500 on a €50,000 loan over five years. PTSB is expensive if you're borrowing to buy a car that is six or seven years old as the interest rate gets higher as the car gets older. It costs €13,593.40 to borrow €50,000 from PTSB to buy a car with a 2011 registration. The interest comes to €11,549 if borrowing to buy a new car - which is still expensive.

Cheapest for bank loans

Many people prefer to take out a bank loan than hire purchase when buying a car - because there are fewer strings attached.

KBC, Ulster Bank and Bank of Ireland are the cheapest for a car loan of €20,000, while AIB and PTSB are the most expensive. It costs either €3,272 or €3,799 to borrow €20,000 from KBC over five years - depending on whether you qualify for its discounted 6.3pc rate or its standard 7.3pc rate. Ulster Bank charges either €3,583 or €4,111 interest on a five-year loan of €20,000 - again, depending on whether or not you qualify for its discounted rate of 6.9pc. It costs €3,906 to borrow the money from BoI, which charges 7.5pc interest (as long as you have a current account with the bank). It costs around €4,600 to borrow the money from AIB or PTSB. (PTSB charges more if you're buying a car which is more than three years old.)

KBC and BoI work out cheapest for a €50,000 bank loan. It costs €8,180 to borrow €50,000 over five years from KBC under its discounted 6.3pc rate; €9,498 with its 7.3pc rate. It costs €9,766.60 to borrow the money from BoI, which charges 7.5pc interest.

Loan versus hire purchase

Getting a bank or credit union loan is probably the most straightforward way to borrow money for a car. You will own the car immediately - which is not the case with hire purchase as you don't own the car until you make the final repayment. Remember too that your local credit union may offer a cheaper car loan than the bank.

Should you run into difficulties repaying a bank or credit union loan, you could sell the car to repay the loan - or you may be able to come to an arrangement where you spread the repayments out over a longer time. With hire purchase, however, the finance company may have the right to repossess your car if you fall behind on your repayments.

You are not tied to any particular models or brands of cars if buying with a bank loan. To borrow money from a dealer, however, you must buy a car that is being sold by that dealer.

Should you be considering getting finance from a dealer, understand the conditions of the finance agreement. Many dealers are now offering personal contract plans (PCPs) to prospective car buyers. Although PCPs are a type of hire purchase plan, they are different to traditional hire purchase as they typically have a large balloon payment at the end. There may also be extra fees and tricky conditions built into a PCP. As always, buyer beware.

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