Sunday 21 January 2018

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

There are various ways to borrow money to buy your dream car, but be wary of the PCP as it's not for everyone, writes Geraldine Herbert

with low interest rates and other attractive incentives there's never been a better time to buy a new car.

There are three main options when you are looking for finance - a personal/car loan, buying on hire purchase or through a personal contract purchase (PCP).

Borrowing money from a bank, building society or credit union leads to ownership of a car.

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.

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

When you have made 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 your payments you stand to lose both the car and all the money you have spent on it.

PCP deals have proved particularly popular over the past few years. With a PCP contract you pay an initial deposit of between 10 and 30pc, which is typically funded by a trade-in of your existing car. The lower the deposit the higher the monthly repayments. The car dealer then estimates what the car will be worth at the end of the contract. This is called a Guaranteed Future Value (GFV). The GFV is then deducted from the car's selling price and the repayments are based on the balance. The figure put on the value of the car at the end of the contract is likely to be set conservatively, which is to aimed to encourage the buyer to take out a new PCP with any extra money that may be made at the end.

At the end of the PCP contract you have three options; You can hand back the car at no extra cost subject to the agreed terms and conditions; start a new PCP deal and use any equity in the car (if the car is worth more than the value put on it at the start) or you can pay off the GFV to buy the car outright.

So, for example, if your car costs €20,000 and the dealer estimates its value after three years as €10,000, you would make repayments on €10,000 minus the deposit plus interest.

At the end of the three-year term, you can pay the €10,000 and take the car, give the car back and owe nothing, or start a new PCP on another car.

In some cases you can 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 to use on another PCP.

It is for this reason that the guaranteed future value is critical; if it is set too low you will be paying higher monthly instalments to compensate. If set too high you will have lower payments but may have to top it up to make the next deposit.

The reality is however there may not be any equity and you will have to find the deposit for a replacement car elsewhere.

The benefits of a PCP are low monthly repayments as rates for car finance are usually more competitive. Some car manufacturers, such as VW, Renault and BMW, run their own 'banks' specifically to lend for car purchases, while others have pre-agreed packages with the major banks. Some makers even offer 0pc finance. In addition you get the use of a new car every three years and you also have a choice of what to do at the end of the repayment term.

However in all forms of finance there are downsides. If you miss payments the bank can, and will, take the car off you; If you cancel your contract and return the car you'll probably have to pay a fee. You may not get the colour of car you've always wanted and you won't be able to modify the car in any way.

If you return the car with scratches or any damage you may be charged to cover the cost of putting this right. 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. It is also your responsibility to keep up servicing, repairs, etc and not drive it over a maximum distance per year (this is usually around 15,000km-20,000km). An "arrangement fee", typically €50-€150, may be charged.

Remember, ownership of the car is retained by the dealer or the car company bank.

But what about a car loan? 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.

If you decide to buy a car worth €24,000, use your car worth €10,000 as a trade in and chose to borrow the money needed from the bank, the monthly repayments will be significantly higher than with a PCP arrangement, but you will own the car from day one..

And remember to shop around for loans - some banks offer better deals than others.

Buying a new car can be a daunting task, so before you start hunting for your dream set of wheels set a realistic budget that anticipates future costs and stick to it. Use comparison sites to know exactly what your budget will get you.

And always negotiate the total price rather than a monthly repayment and don't underestimate the value of free servicing or an extended warranty.

Sunday Independent

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