Monday 24 October 2016

Your simple step-by-step guide to new car finance

When you're buying a car, there is an endless choice and the same applies when it comes to finance, writes Geraldine Herbert

Published 02/12/2015 | 02:30

Buying a new car is a costly affair, so do your financial homework firstthe
Buying a new car is a costly affair, so do your financial homework firstthe

You should always research your finance options carefully, including paying with a personal loan, hire purchase or a Personal contract Plan (PCP) and calculate which method works out the best for you.

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Hire purchase (HP):

Hire purchase is the simplest form of finance outside of a personal loan. With HP, you pay a deposit up front (often 10pc) and then pay the rest off in monthly instalments over an agreed period. After the last payment, you own the car.

It is worth remembering with any HP contract, be it for a three-piece suite, sound system or a car, that you do not own the asset until the final payment is made.

Two years down the line and €15,000 later, if you can't keep up the payments, you stand to lose both the car and all the money you have spent thus far on it.

If you do run into difficulty repaying the loan and you have repaid at least half the amount owed, then all is not lost, you may qualify under the half rule.

The 'half-rule' is part of the Consumer Credit Act, 1995 and gives you the right to end a hire purchase agreement at any time, provided you have paid half the hire purchase price of the car.

The exact figure that is accepted as half will be contained in your loan agreement. To avail of this facility, you should write to the finance company or bank and inform them that you want to return the car availing of this half rule. You may then return the car to the lender and not be liable for any further payments.

Personal Contract Plan (PCP):

Personal contract plans (PCP) are a more affordable way to get into a new car and are becoming more popular.

The contract is typically structured so that you pay a deposit and monthly instalments over a fixed term. However, unlike HP or a bank loan, the payments are typically lower and at the end of the agreement you have the choice of whether to make that final payment to own the car or not.

A PCP comes with a guaranteed future value for the car and this is treated as the final payment, so you know exactly what it will be worth at the end of the agreement.

This final value depends on the predicted annual mileage of the driver, so you can adjust the agreed amount to suit your needs.

At the end, you can pay the final payment and own the car. You can also part-exchange the car and use the excess or equity in the car to fund the next purchase.

Many people use the equity in the car to act as a deposit for a new PCP deal and get a new car via this method every few years.

So, for example, if the final payment is €9,400, but the car is actually worth €10,600, you have €1,200 in equity. This can be then used as a deposit towards a new car. Finally, you can simply return the keys at the end of the payment plan with no future obligation.

Personal Loan:

The simplest way you can finance the purchase of a new car is by getting a personal loan either from your bank or credit union. You can typically take out this type of loan with repayment terms ranging from three to five years and even in some cases you can go as long as seven.

The best way to compare loans is on APR - the annual percentage rate - as this allows you work out how much a loan will cost you over its lifetime.

Although bank loans may seem expensive in comparison, they do allow a buyer the flexibility of purchasing with cash and offer a greater range of repayment periods, usually ranging from six months to five years.

They also extend the choice to all dealers, not just those offering PCP deals, and to second-hand cars.

For example, you borrow €15,000 and the interest over four years is €2,750, then your monthly repayment will be €369.79 (€17,750/48)

When it comes to buying, always negotiate the total price, rather than a monthly repayment, and don't underestimate the value of free servicing or an extended warranty. Most importantly always be willing to walk away. Remember, you really are in the driving seat.

Key terms to understand

APR - Annual Percentage Rate: This is the amount of interest charged on the loan, including any fees. All lenders must calculate the APR in the same way, so it is not only the best way to compare loan providers, but it shows how much you're actually going to pay over the period of the loan.

Credit rating, history and record: Before approving a loan, your lender will want to know you are in a position to repay the loan and have not defaulted on loans in the past. To do this, they will look at your credit history, ie your previous borrowing, employment history, earnings and whether or not you own your own home. Factors like these determine your credit rating and the better your credit rating (or score), the more likely it is that they'll be willing to lend to you.

Depreciation: This refers to the value your car loses over time due to mileage, wear and tear and ageing.

Flat rate: The monthly interest rate charged on the amount borrowed over the term. Do not choose a loan based on this rate, always go by APR. Fixed Rate: A fixed rate means that your monthly payments are unaffected by interest rate changes and will remain the same.

Part exchange: When you use your existing car as part-payment for a new one.

Residual value: The worth of your used car, taking into account depreciation, condition and mileage.

Term: The length of the contract or loan, usually between 12 and 60 months, i.e. the life of the loan.

Variable rate: If the interest rate charged can go up/down with normal interest rates during term of the loan, then the rate is called a variable rate.

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