Hire purchase, personal contract purchase and leasing are all options besides outright buying in common use, but caution is needed to find the right deal, writes Una McCaffrey

If it's January, then it must be time to buy a new car - or so the advertising issued by the motor trade would have us believe. Whether we like it or not, the clever persuasion has worked in the past: around one-fifth of annual car sales traditionally take place during the first month of the year.

In 2000, the year of the coveted 00 registration, 40,000 of us left forecourts at the wheels of shiny new vehicles during January and, while the number has been diminishing since, new-year business remains brisk for the car dealers.

There is of course a price to pay for the satisfaction of displaying the latest plates. With the average family car currently costing around €25,000 (£19,700), few are in a position where they can walk into the showroom, slap down wads of cash and drive away in whichever model they fancy. Enter the tedious side of the whole deal: financing the purchase.

While motor loans and hire-purchase deals may not offer the same excitement as alloy wheels or metallic finishes, they usually merit closer consideration than most consumers would care to give them. As with all financial arrangements, money can be both saved and lost depending on which dotted line is signed, and the only way to ensure that the right decision is made is to do some research.

The first step to getting a good deal comes in being aware of exactly what is available. Just because a car is marketed in conjunction with one particular finance deal does not mean that other options cannot be associated with the same vehicle, or that independent finance cannot be arranged. In fact, there are four main routes to financing a new car, all of which offer their own advantages and disadvantages for different people.

The finance option featured most commonly in car advertisements is hire purchase (HP), an arrangement whereby the vehicle is both hired and bought by the purchaser.

Such deals usually involve monthly repayments spread over a fixed period of up to five years, and are generally arranged by the garage which is selling the car.

By definition, ownership of cars "bought" under HP deals only passes to the driver when the final payment is made, thus making this option unattractive to people who prefer to own property outright.

Anecdotal evidence from the forecourts suggests that between 40 per cent and 60 per cent of car purchases are financed through HP deals, with many garages employing business managers to deal exclusively with this kind of business.

Mr Michael Purcell of Esmonde Motors in Stillorgan, Co Dublin, has declined to go down this route in his salesroom, arguing that the harder the sell, the less likely consumers are to consider alternative options that may be more suitable for their personal circumstances. "The finance guy has to make a living," he says.

Most garages will have relationships with several different finance houses, and will renegotiate those relationships every so often. Currently, APR of around 8 per cent applies to the average HP deal, with most consumers choosing to make 25 repayments over two years, or 61 repayments over five years.

The main advantage of accepting HP finance offered by the garage selling a car is that it will generally be arranged quickly and with minimum effort on the part of the purchaser. The flipside of the apparent simplicity comes in the small print, however. HP deals can entail extra fees and charges for people who decide to break the terms of the agreement by, for example, making early repayments.

Worse still, repossession can occur when repayments are missed, although this becomes less likely when more than one-third of the HP price has been paid, as legal protections begin to kick in. Another issue to watch is the so-called "balloon payment" at the end of the HP term, whereby motorists are required to pay a lump sum to finally take legal possession of their vehicle.

Balloon payments are also a feature of one of the other main finance options: the personal contract purchase (PCP), a relatively recent variation on the HP model. The PCP is simultaneously tempting and extremely dangerous, especially for younger drivers who don't have access to much capital.

Under this kind of deal, motorists effectively rent their car over a period of three to five years at comparatively low cost, but will be required to make a substantial balloon payment (as much as half the original value) at the end in order to take ownership of the vehicle.

Since this means that most of the payments are deferred until the end of the term, the legal safeguards applicable to HP arrangements take effect much later than they would under more old-fashioned deals. There's also a real danger of the lump sum payment exceeding the car's market value when the time comes, thus leaving drivers nursing losses at a time when they might otherwise wish to trade up.

All things considered, the PCP is a risky option that's best avoided by undisciplined consumers who have even the slightest doubt about their future financial health.

Back on the forecourt, Mr Purcell is not a fan of PCPs, arguing that new drivers can be blinded by the appeal of their new car at the beginning of the term, only to start a "battle royale" when the time comes to make the balloon payment, arguing that they were not made fully aware of how the deal would work.

The consequence of this in the last few years has been an increase in numbers of repossessed cars for auction, says Mr Purcell, who reckons it's always better to do a straightforward hire-purchase, "even though it might look a little dearer on the page".

Mr Purcell also believes the PCP does not sit well with the traditional Irish mentality of owning a car, a value that he admits is less evident now than it was a few decades ago. He says the majority of older people who buy cars from his garage arrange finance with their bank or credit union before they set foot on the forecourt, thus enabling them to immediately buy their vehicle outright.

"It's probably a throwback from years ago when they thought certain garages were charging more than they should have for the finance," he says.

Drivers falling into this loan category will generally borrow a lump sum from their bank or credit union for the specific purpose of purchasing a car. All the major banks and building societies are active in this market, with a number operating websites where customers can make online applications.

Some institutions have even taken to writing to customers to inform them that they have been pre-approved for a loan without ever having applied. For the purchaser, this loan offers several advantages over the HP or PCP options, aside from allowing them to own their car from the very start.

In practical terms, it sees buyers taking on the purchasing power of paying in cash, and can thus lead to savings or discounts on the ticket price. Shopping around for the best loan rates is crucial, however, with large variations common.

Current fixed APR on motor loans ranges between 7.9 per cent and 10.99 per cent across the various financial institutions, for example. Credit unions will generally offer less competitive rates than banks, but may balance this against greater flexibility in the repayments schedule.

The final way to finance a car purchase is leasing, an arrangement whereby a finance company owns the car and charges the driver a fixed fee for its use.

A deposit is normally payable at the start of the relationship and, depending on the deal, consumers may have the option of handing over a final fee in order to own the car. There are pitfalls along the way, such as penalties for ending the agreement early or repossession upon missed payments.

Leasing, always more popular among business people who can claim VAT allowances than among average consumers, has become much less common since the arrival of the PCP.