If you’re buying a car, whether new or used, you’re more than likely going to be financing it somehow. Few, if any of us, have the necessary readies put aside to fund anything other than the most basic, and aged of cars
So finance it is and off we trot into a world of APR, deposits, PCP and hire purchase. Don’t fret though, as the options are generally simpler than you think and once you’ve done some homework, you’ll be fine.
As always, pay attention to any interest rates quoted (whether fixed or variable; most likely variable) and make utterly sure you’ve been through all the fine print with a tooth-comb - more than a few supposedly smart buyers have been caught out by the terms and conditions.
One of the best bits of recent news has been the arrival of the car company banks. In the past, finance packages sold on a new car were usually done in co-operation with a ‘high street’ bank.
Now though, an increasing number of car makers have their own internal finance arms, which are competing directly with the major commercial banks both in terms of interest rates and acceptance of loan applications.
Based on finance checks carried out by Cartell.ie in 2013, Volkswagen Bank and BMW Financial Services each hold 8% of the automotive finance market in Ireland, though only 3% of our surveyed readers used manufacturer supplied finance. It will be interesting to see if that rises over the next six months.
Buying new or used, your primary options are:
Hire purchase
This is usually offered by a car dealer, either on a new or used car, and is one of the simplest ways of financing a purchase.
The money usually physically comes from a commercial bank, most often, which means there’s a greater danger of your loan application being turned down.
However, some of the major car companies (Renault, BMW and Volkswagen most notably) now have their own internal banks and they are much more likely to approve your loan.
Either way, make sure the repayments aren’t too steep and that you can keep them up even if interest rates rise. And of course you won’t actually own the car until you make the final payment.
PCP (Personal Contract Purchase)
PCPs have become very popular since Ford first introduced them in the UK in the early nineties. Essentially they are like having your own personal company car programme.
You pay an initial deposit (generally between 10 and 20%) and then finance a certain amount of the car’s purchase price, repaying over (usually) 36 months and leaving a ‘bubble’ payment at the end. That bubble is usually around €5,000 on a family car.
Generally a PCP will guarantee a future residual value for your car and any of that value above the amount of the bubble can be used as a deposit on your next purchase.
Or you can just pay the bubble amount and keep the car, or hand back the car and finish the plan at no extra cost.
Beware though; some PCPs will have mileage limits and a minimum standard of maintenance that must be adhered to.
Also, while the monthly repayments would likely be lower, the overall cost may actually be higher than that for Hire Purchase. A PCP would usually only be offered on a new car.
Reflecting that, only 6.4% of our survey respondents that used finance to buy their car have signed up to a PCP, and only 12.5% suggested they’d consider it next time.
Personal loan
In many ways, this is the most straightforward way of buying any car. You own the vehicle outright immediately and you would usually be dealing with a bank to which you are already a known and valued customer.
As ever though the devil is in the detail and you will need to keep a close eye on the likelihood of an interest rate rise to ensure that your loan remains affordable.
A fixed rate loan would probably be best at the moment (given that European Central Bank rates are at an historic low), but may be hard to get a bank to agree to.
There is some anecdotal evidence to suggest that banks are currently reluctant to loan amounts greater than around €15,000 for a personal car loan, limiting their usefulness for a new car purchase, but as ever it will depend greatly upon your personal circumstances and credit history.
Its well worth investigating the Credit Union as well, as they can often be more eager to lend and also easier to deal with if your circumstances change for the worse.
The vast majority of our readers surveyed used an overall loan with full repayments to finance their car. Of those that used finance at all, 77.5% confirmed they used a personal loan and 59.8% said they’d consider a personal loan next time.
Credit card
No, don’t laugh - this is an option depending on your credit limit and your personal financial discipline.
The upside is that any purchase is immediate, you own the vehicle outright and the bonus is that the credit card company is duty bound to assist you in the case of any fault with the purchase. Again, this depends on the price but most credit card purchases, usually up to a value of €30,000, are covered by insurance.
The obvious downside is interest rates. APR on a credit card purchase can easily break the 20% barrier so you’d better be quick with the repayments and nothing wrecks your credit history faster than missing your card bills.
Mortgage
Again, don’t laugh. For a select few who own their homes outright, taking out a small mortgage is the most affordable way to finance a car purchase and makes sense if you’re spending a significant amount of money.
Be careful though; your house is, of course, at risk if you miss repayments and you are effectively taking out a property loan to buy a depreciating asset.
This is an option that probably works best for older buyers, keen to unlock some of the value in a property that has weathered the recession well.
With any of these options, it’s worth chatting to a personal financial advisor before committing.
Survey results
We asked our readers to tell us if they used finance to purchase their current car, and if so, from whom and of what type. The results make interesting reading. A surprisingly high 57.5% didn’t use finance at all. Of those that did, high street banks and dealer finance schemes lead the way, and, as mentioned above, 77.5% of all financing was through overall loans with full repayments.
Given that most of those surveyed had bought a used car it was no surprise that PCPs were taken out by just 6.4% of the respondents, though more indicated a willingness to consider it next time around. Lease plans were taken out by 10.4% of those questioned.
On a positive note, most people found the process of obtaining finance quite easy, 44% of respondents indicating that it was easy, 24.6% saying it was difficult and 31.4% in the middle. Backing that up, 88.6% of respondents had never been turned down for finance.
Top Buying Tip: Investigate all possible sources of finance open to you and calculate all of your costs for the duration of the finance. Don’t forget to factor in depreciation, as it’s often overlooked.