Friday 13 December 2019

Spoilt for choice on how to finance your next car - just be careful out there

Personal Finance Editor Charlie Weston outlines the options and gives his expert advice on how you should go about getting the best value for your money

Examine your options before making a decision on car finance (pic: Deposit Photos)
Examine your options before making a decision on car finance (pic: Deposit Photos)
Charlie Weston

Charlie Weston

THE finance options for car buyers are expanding almost by the day.

Growing bank, KBC, is cutting its personal loan rates for those who have a current account with it.

Credit unions insist they have €5bn available to lend.

And personal contract plans (PCPs) are fast becoming one of the most popular finance options for those buying a new car.

And now PCPs, essentially lease deals, are available for some used cars.

Lower rates

Expanding KBC Bank is cutting its personal loan rates for those who make repayments from their current account.

The bank is also introducing a new cash-back scheme on its credit card, as it attempts to get customers to move to it from AIB, Bank of Ireland and Ulster Bank.

Customers who take out a loan with KBC and pay it off through their current account with the bank will get a 2pc discount on the rate.

The bank's new loan rates will be among the lowest in the market, putting pressure on rivals to cut their rates.

Personal loan rates here are high compared with other eurozone countries, Central Bank studies have found.

For a loan of €20,000 over five years KBC will charge 10pc for those who can avail of the 2pc discount. This is the same as the interest rate charged by AIB, but lower than the 12.8pc charged by Bank of Ireland, according to information on the National Consumer Agency's website.

Ulster Bank charges 10.03pc for a loan of this size, with Permanent TSB charging 10.5pc.

The new KBC loan rates are fixed, but there is no charge for repaying the loan early if they amount repaid is less than €10,000.

And a new car finance company is also aiming to pick up a large chunk of the market. First Citizen Finance has interest rates from 8.9pc.

More PCP deals

Bank of Ireland Finance and vehicle distributors are have unveiled PCP deals for certain used cars (as revealed exclusively in Motors some time back).

It already has PCP deals for new vehicles and partners 14 motor franchises in the Irish market.

But up to now PCPs have applied in the main to new-car purchases so it is viewed as a significant development that a bank is extending it to used cars - albeit with a specific age threshold.

PCPs have become massively popular. They have come from nowhere to become one of the most popular financing options in less than two years.

Volkswagen Bank says it now finances six out of 10 deals for the Volkswagen brand through PCPs.

More than a third of the car sales for Renault Ireland involved PCP last year, according to Renault Finance Ireland boss Brian McNulty.

The company only introduced this form of finance in January 2013.

"It is increasingly popular because monthly repayments are low. At the end of the term you can keep the car, and make the final payment, or upgrade to a new car."

PCP is essentially a new twist to the hold 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 take, is to exchange the car for a new model and 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 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.

Hire purchase

Car buyers don't always realise that the car finance they are offered in salesrooms is a hire purchase agreement. This was traditionally a forecourt favourite.

The key difference between a hire purchase 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 have finished paying 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 rock bottom. Peugeot charges 3.9pc on a range of models. This is a fraction of the interest charged for a personal loan by a bank.

Bank of Ireland offers HP deals, with an interest rate of 8.6pc.

The small print - the bits to remember and watch out for:

* Although HP deals can be a cheap way of buying a car, these agreements also come with a number of downsides.

* You can have the car repossessed if you continually miss repayments, while there are a range of fees and charges built into the deals.

* For example, 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 National Consumer Agency.

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

Credit unions

The popularity of credit unions for car loans has waned, but they say they have €5bn available.

The big advantage is that you own the car if it is financed this way, there are no document or completion fees and there are no balloon payments to be made.

Car loan rates range from 6pc to 9pc, depending on the credit union.

A spokeswoman for Irish League of Credit Unions says: "When you borrow from a credit union you own the car from the outset.

"There is no need to worry about exceeding mileage limits or excessive wear and tear."

Check ownership

Almost a quarter for second-hand cars for sale have finance outstanding on them, according to research conducted by Cartell.ie, a service that helps consumers and dealers check the history of a car.

Car finance deals are often hire purchase agreements. If someone who buys a car using hire purchase has not paid off all the money owned under the deal they will not own the car.

If the terms of hire purchase deal have been breached without the agreement of the hire purchase provider then the person who has the car may not be entitled to sell it.

An unsuspecting buyer of a car with outstanding finance on it, could find that the car is repossessed on them by the finance company.

Cartell.ie checked 5,906 Irish cars and found 26pc registered in 2008 and 23pc registered in 2007 had loans attached. It is not clear how many were sold privately or otherwise.

While car finance terms differ, almost all mean the lender retains ownership and preclude a sale until the loan is repaid. The National Consumer Agency (NCA) says the issue highlights a lack of awareness about how car finance works.

A spokeswoman for the NCA said the standard position is the finance house buys the car from the dealer and hires it out to the new owner. "The consumer does not take ownership of the car until the last payment has been made.

"Someone selling a car on finance is breaching their agreement with the finance company. So if you buy a car that is still on finance, you simply don't own it."

A buyer then faces having the car repossessed, reaching a new arrangement with the lender or tracking down the seller to ask them to pay off the debt.

Regardless of where you get the finance, please take time to study the deals you are offered and make sure you can meet all the requirements.

And then enjoy your new car.

Irish Independent

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