#MyCar2015 - How to avoid all the pitfalls of car finance
Sinead Ryan's step-by-step guide to to buying on HP and the new fangled PCPs
It's not even springtime and already new car sales are showing signs of growth. January figures are up 31pc from the same period last year and the Society of Irish Motor Industry is confidently predicting 100,000 new registrations before year end, the highest since 2008.
Showrooms are polishing the windows, sprucing up their salespeople and making sure that new leather smell hits every prospective buyer coming through the door.
Not far inside they'll also find the friendly desk where they can buy, with low, low payments, a brand new model.
Sometimes interest rates look simply too good to be true and even finding the money interest free is possible.
Taking out a car loan is an expensive business normally. With banks charging up to 14.5pc for personal loans, it's very tempting to see a very low finance offer in a garage and not want to sign up. But what's the catch?
What you're actually buying, is a PCP, or Personal Contract Plan - another name for hire purchase.
While it is a loan, you never own the car until the very last payment.
The top three manufacturers are Volkswagen, Ford and Toyota, all with their own finance arrangements.
Renault loaned €200m in car finance over the last four years through its French parent bank.
In Ireland, Bank of Ireland Finance is the main supplier of PCPs and your contract is with them, not the garage.
There is nothing inherently wrong with PCPs. Six out of 10 Volkswagens were purchased this way last year, for example. People like new cars and this is a cheap way of getting one.
Most manufacturers offer a range of PCPs across a variety of models, through their garage network. Finance can cost anything from zero to 9pc typically.
It's far less than an unsecured bank loan and they will take your car as a trade-in towards the deposit.
But while the upside might be low monthly payments, there are downsides, especially if you get into trouble with repayments:
PCPs are leases: Until the final payment is made the car is not yours and can be repossessed if payments are missed.
If you have paid less than a third of its value, the finance company doesn't even need a court order to do this. It is a 'secured' loan.
The reason you pay so much more interest with a personal loan from the bank or credit union is that it is 'unsecured'. While they will certainly chase missed payments, they can't lift the car.
There will be a hefty deposit payable at the outset. This can be partly via trade-in but will be in the range of 10 - 50pc. The balance of the money is repaid over a fixed period, say 36 months. There may or may not be a 'balloon' payment at the end - this keeps monthly payments artificially low but financing this, when the car is three or five years old can be difficult and is often done by rolling over the loan into a new one.
It is typically termed the "Minimum Guaranteed Future Value (MGFV)" and is calculated by the Finance Company in advance.
You are entitled to know what the overall "cost of credit" is, ie. by the end of the contract, how much will the car actually have cost you.
Many manufacturers are upfront about this as it appears good value compared to a bank loan.
Some firms also charge documentation or arrangement fees of around €150 to set up the contract and there will be underwriting in terms of affordability and repayments but the vast majority of loans are approved.
When it all goes wrong: If you find you can't meet repayments, even just a couple, the finance company will try and get you to sign a 'Voluntary Surrender' (VS) document. If you do, they repossess the car but you are still liable for the outstanding debt. You will also have to pay towing and search fees, and possibly wear and tear payments if they deem it to be in worse condition than expected.
However, under the Consumer Credit Act 1995, you have the right to cancel a PCP agreement at any time and return the car.
If you have already paid half the total value of the loan (including interest due) then you are not liable for the balance on returning the car. This is called the 'Half Rule' and will be buried deep in your loan agreement. Indeed, after a recent High Court decision, you may only be liable for half the payments in any event upon return of the car.
To avail of it you must: Write to the finance provider (not the garage) telling them you are returning the car under this rule. Do not sign a VS form.
Agree a pick up point for the car. Take internal and external pictures (you are responsible for damage and repairs).
And perhaps, if you find you need a PCP loan, it might be that the second hand market is for you, after all.