Think money first and car second or you could be paying over the odds
Charlie Weston warns of finance pitfalls and picks out some deals
Published 20/01/2016 | 02:30
The choice of a car finance option is often something left until the last minute for car buyers, when in fact it should be the first part of the process of acquiring a new motor.
Surveys have shown that car buyers will spend up to six months seeking out a suitable vehicle, but as little as two hours working out how to pay for it.
The upshot of this is that more than a quarter of consumers have no idea how much interest they are paying on their motor finance deal.
And this is key to the cost of buying a car, because even a 2pc difference on a €17,000 loan can mean a difference of €340 a year in repayments.
Despite not knowing how much interest they are paying on car finance debt, most divers think the interest rate is the most important factor for car buyers when availing of car finance, a survey commissioned by One Direct, a subsidiary of An Post, shows.
Carried out by Ignite Research on 765 drivers, it found that 94pc of car owners spend up to six months shopping for a new car.
But four-in-10 buyers dedicate just a few hours, or even less, to choosing a finance option to fund their purchase.
It seems that motorists are allowing the lure of their new wheels trump the impact on their wallets. This leaves car buyers susceptible to sometimes questionable finance deals offered at forecourts.
Deputy chairman of the Consumers' Association Michael Kilcoyne urges motorists to stop, think and shop around before committing to a finance package to ensure it offers good value.
Again, it is worth repeating that a quarter of all car owners admit they have no idea what interest rate they are paying on their current finance package.
So it is time to get down to basics and understand what is going on - and save yourself some money in the process.
Here are some of the main options available on the market at the moment:
Hire purchase: Car buyers don't always realise that the finance they are offered in salesrooms is actually a hire-purchase agreement. This was traditionally a forecourt favourite.
The key difference between a hire purchase (HP) agreement and a personal loan is that by buying a car with a personal loan you own the car as soon as you hand over your money.
With a hire purchase agreement, you do not own the car until you pay off every last cent on the HP deal. At the end of the agreement, the finance company passes ownership of the car to you, provided you have made all the repayments. Interest rates on HP deals are attractively low. For example, Toyota charges as low as 3.9pc on some of its HP deals. This knocks spots off the interest charged for a personal loan by a bank.
But with HP it is worth remembering that you can have the car repossessed if you continually miss repayments, while there are a range of fees and charges built into the deals.
If you are having difficulties meeting the agreed monthly repayments you may be charged a fee of €60 if the lender agrees to change the terms of the agreement, according to the Competition and Consumer Protection Commission, the State body that protects consumers.
You can have a penalty fee imposed for missed monthly repayments. In addition to this you could have an interest surcharge added in.
But you don't have to rely on the dealer for HP deals. Banks and finance houses are now offering them. Bank of Ireland have HP deals, with an interest rate of 8.6pc. AIB has a fixed interest rate of 8.45pc on its hire purchase deals, with a typical agreement for more than four years. First Citizen, which also offers deals through the State's 1,100 post offices, is offering hire purchase deals, saying that typical interest rates are 8.5pc. The deals only apply to borrowings of more than €4,000.
Personal loans: Banks are back trying to tempt us to take out car loans. Some, such as Ulster Bank, have cut their loan rates, but banking lending is still expensive compared with other options. AIB offers interest rates of 9.99pc for loans that are greater than €10,000. If you are borrowing less than this, the interest rate is 12.99pc.
Permanent TSB claims you can get approval in three hours as long as you have a current account with the bank with your salary going into it each week or month. It claims to be offering 100pc finance, with no balloon payments. The interest rate depends on the age of the car you wish to purchase. This means that cars registered between 2010 and 2012 will carry a rate of 9.3pc.
Bank of Ireland offers loans for amounts up to €7,000. It says the interest rates can be as low as 7.5pc, but can vary depending on individual circumstances.
KBC offers a 2pc discount for current account customers.
Ulster Bank's representative interest rate of 8.5pc is for loans of €8,000 to €11,999.
Credit unions: Their interest rates are competitive, despite each one setting its own. For example, the Health Services Staff Credit Union offers with rates that leave the banks in the shade. Its loan rate for cars is 7.2pc. This applies for new and used cars, and proof of purchase is required.
The Progressive Credit Union, that covers large parts of north county Dublin, has car loan rates of 7.75pc. Sty Canice's in Kilkenny charges 8.2pc.
To borrow from a credit union you need to become a member first and save with it. To join your local credit union, you must be living in the area that it serves, but you might also be employed in a company that has a staff credit union or a member of a professional body that runs its own credit union.
The process is much like applying for a loan with a bank in that you'll need, in this case, three recent bank statements and three payslips. Then it will discuss suitable loan amounts and the duration before processing your application. It will also ask permission to check your credit history with the Irish Credit Bureau.
PCPs: Personal Contract Plans (PCP) are becoming dominant in the car finance market. PCP is essentially a new twist on the old hire purchase agreement. You pay a deposit, which is typically between 10pc and 30pc of the value of the new car. You then make monthly payments, which will usually be for three years. At the outset you agree the number of kilometres you are going to clock up over the period of the agreement. If you keep to this, the car will have a pre-agreed value at the end of the deal, known as the minimum guaranteed value.
At the end of the three years you have a number of choices. You can buy the car outright for the guaranteed value agreed at the start. Alternatively, you can hand back the keys and walk away.
The option that most people take, and the one the dealer will be hoping you opt for, is to trade in the car against a new model. You finance this with a new PCP deal, but you will have to make a bubble payment for the outstanding amount owed on the car being traded in.
The agreed minimum value for the car you are parting with is effectively part of the deposit for the new one. The key thing to remember about a PCP is that you do not own the car unless you buy it outright at the end of the agreed term.
And here is a help with the small print - the bits to remember and watch out for - which consumers often overlook:
*High mileage could mean a lower minimum guaranteed value.
*A lot of wear and tear may also mean you do not get the full value of the car agreed at the start of the deal.
*If you have a crash and the cost of the repairs is greater than 66pc of the original list price then you may also not get the minimum value you were hoping for.
*Because a lot of the repayments are deferred, the interest costs may be low initially, but the total ends up being high over the full length of the agreement.
*Dealers and car-company banks are able to offer lower interests rates on the deals for the first three to five years because they retain ownership of the vehicle, lowering their risk.
Take the top-selling Volkswagen Golf. The annual percentage rate (APR) on the entry-level Trendline grade is 5.9pc. You pay a €5,500 deposit on the on-the-road-price of €21,000, and the monthly cost is €269. This is based on a guaranteed minimum future value of €7,685. On the Comfortline model the interest rate drops to 3.9pc. Rates fall as low as 1.9pc on higher-spec models.
Finally, regardless of what finance deal you strike make sure to take plenty of time over it and shop around for the best terms possible. That way you know what you are getting and you will probably save yourself a good deal of money.