Sunday 4 December 2016

Why PCP may NOT be the best way to finance your car. Here are some other options to consider

The Irish Independent's Personal Finance Editor guides you through the alternatives and outlines the pitfalls to help save you money on buying a car

Published 08/06/2016 | 02:30

There are several options available when financing a car.
There are several options available when financing a car.

The growing popularity of PCPs (personal contract plans) has obscured the fact that there are several other viable options for financing the purchase of your car.

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This applies whether it is a new or used motor.

Motorists often spend more time shopping for a car than thinking about how to finance it.

Experts say this is a mistake.

The upturn in our economic fortunes means there are now plenty of good-value motor finance deals available.

Getting a low interest rate is the key to getting a good deal.

AA Ireland advises consumers to buy in cash but if that isn't always possible, then look around for various credit options.

"The best way to buy a car is with cash. Easy advice to give but of course most of us will need to finance the car in one way or another.

"If you need to borrow part of the amount, don't automatically take the dealer's finance. "It's always worth getting alternative quotes - preferably before you start viewing cars so you know what you can afford," says Conor Faughnan of the AA.

However, surveys have shown that up to half of drivers admit they have no idea what interest rate they are paying on their current finance package.

Credit unions

Credit unions were traditionally where people went to for car finance. And they have plenty of money available, as most of them are under-lent.

Their rates are competitive, despite each one setting its own loans rates.

Car loan rates are often lower than other rates within the credit union, with some charging as little as 5pc.

The big advantage with funding through a credit union is that you own the vehicle, rather than leasing it, or effectively renting it as you do through a PCP deal.

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 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.

You will also need to provide evidence, such as a sales invoice, that you bought the car.

This is to stop people pretending to borrow to buy a car, but then use the money for something else.

Hire purchase

Car buyers don't always realise that the car finance they are offered in sales rooms 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.

Ford charges interest rates of as low as 3.9pc APR (annual percentage rate) on some models.

This is very competitive compared with 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 they 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.

You can have a penalty fee imposed for missed monthly repayments. In addition to this you could have an interest surcharge added in.

You don't have to rely on the dealer for a HP deals. Banks and finance houses are now offering them.

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. A minimum deposit of 20pc is required.

Personal loans

Banks are back trying to tempt us to take out car loans.

AIB offers interest rates of 12.99pc for loans that are less than €10,000.

If you are borrowing more than this, the interest rate falls to 9.99pc.

Permanent TSB claims you can get approval in three hours as long as have a current account with the bank with your salary going into it.

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 2011 and 2013 will have rate of 8.9pc.

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. The rates depend on the amount you are borrowing, with lower interest rates on larger amounts borrowed.

Ulster Bank's representative interest rate of 8.17pc is for loans of €10,000 over five years.

PCP

Personal Contract Plans (PCPs) 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 exchange the car for a new model. You finance this with a new PCP deal.

The agreed minimum value for the car you are parting with is effectively 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.

The small print -

the bits to remember and watch out for:

* High mileage can 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.

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