A hard-fought bargain can be lost in a second's signatory madness - and it can cost you a pretty penny. Kieran Fagan urges caution.
You shop around for the best price for your new car. You haggle, kick tyres, hold out for the best trade-in allowance. You're happy that you have got the best price.
You cannot wait to drive away in your gleaming new purchase, and so you just sign the paper the dealer puts in front of you. And you throw it all away by signing up for a finance plan which puts all your hard-won gains back in the dealer's pocket.
It happens because some motor dealers pad repayments to make extra profit, and the lenders go along with it. You pay your loan instalment to the bank or finance house, and it pays a rebate of your money to the garage. But if you are a regular customer, you are less likely to be "skimmed" in this way, according to motor industry sources.
Most motor dealers offer a finance deal with its own friendly banker. Don't assume you will get the same interest rate that the lender, say AIB or Bank of Ireland, offers you over the counter or via online banking. You won't. But you can haggle - using the information given in the attached table as a guide.
What it tells you is that you should not repay much above €315 a month on a three-year loan of €10,000, not much above €200 per month on a similar five year loan, and you should consider inviting the lender to stick the set-up charges where the sun doesn't shine, provided you have a decent credit record.
Permanent TSB is a major player in the dealer-as-intermediary market, as is Bank of Ireland.
A relatively new but fast growing kid on the block, BOS Ireland Motor is a subsidiary of Bank of Scotland (Ireland) Ltd, and was established two years ago to target the car finance market.
Joint managing director Mr Frank Donnellan says that 90 per cent of buyers fund the deal through a finance package, be that loan, hire purchase, or lease.
BOSI Motor offers a range of products through approved Society of Irish Motor Industry dealerships.
He claims 25 per cent of the car finance market, and says it is growing. "I'm very bullish about 2005. I reckon the market for new car sales will reach somewhere in the region of 160,000 units, and I'm determined we'll increase our share of the financing of these vehicles."
GE Capital Woodchester operates hire purchase through car traders, and offers personal loans to private individuals. Ford runs its own lending operation.
In almost every instance the customer can get a better deal by avoiding the in-house loan offer.
Exceptions include promotional "no interest" offers on certain models, though the financial regulator, IFSRA, warns that such offers can mask higher prices.
For example, compare the rates quoted in the table for a three-year finance deal direct with Permanent TSB with those quoted by Opel via the same lender.
If you go direct to the lender, you may save at least €100 in set-up charges; if your car is new you will save at least €50 a year and maybe more, depending on how much top-up the dealer helps himself to, and that can be considerable, as we shall see.
The borrower with a good credit rating will pay less by getting prior approval for a personal loan. Inquiries made over the past three weeks indicate that a loan package for €10,000 over three years can cost €10 to €15 a month extra sourced through an intermediary like a garage.
The lower sum, €10 a month, yields €360 extra profit over the life of the loan, in addition to the commission. Many loans are for multiples of €10,000, so €1,000 can be gouged out of your bank account on a €30,000 loan. You are also more likely to be asked to pay an extra €100 or so in set-up fees and other charges by going through the dealer. The figures in the table attached indicate baseline figures.
Nobody I spoke to would discuss continuing commission on repayments. Toyota refused to reveal even its lending rates, though I later found them in a "ready reckoner" on its website.
A quick phone around Toyota dealers yielded one quoting a very competitive rate, while two others showed "padding" of between €10 and €15 per month on a three year €10,000 loan.
Opel admitted that the rates charged to the customer for loans were a matter for the dealer involved.
But that is not all. Some lenders insist on, others strongly recommend payment protection insurance for personal loans, in case of illness or unemployment.
Insuring a GE Capital Woodchester five-year variable rate loan of €10,000 can cost €2,153, while insuring a similar loan from Bank of Ireland can cost less than half that - €1,014, according to a recent study carried out by financial regulator IFSRA.
The regulator says you should not automatically accept a payment protection quote from a lender, and if you have a secure job, a sick pay scheme and/or sufficient life and serious illness insurance, you may not need it.
Some lenders side-step criticism by saying they tailor different products to different market sectors. For example, you can get a personal loan direct from GE Capital Woodchester (see table) while a garage offers you a hire purchase agreement from the same lender.
A major difference with hire purchase is that you don't own the car until all the payments are made, while a personal loan means you own it straight away. Goods bought on hire purchase can be repossessed if the payments are not made, though after a third is paid, a court order is required. "The element of hire purchase can work to the consumer's advantage," says Dermott Jewell of the Consumers Association. "If the car gives trouble, a finance company has much greater leverage than a private owner."
Members of credit unions can get loans at rates between 7.5 per cent and 12.68 per cent APR, with most falling between 8 per cent and 9 per cent. Some offer special car loans, other credit unions give rebates at year end.
Credit union loans are flexible. If you run into problems, they make less fuss about rescheduling than the commercial lender. But credit unions are limited in the number of high value loans they can advance, and are more likely to stake you for a family saloon than a BMW 5-series. There are other "affinity"-type loans, such as the reduced rates offered by EBS to its members, and Ulster Bank to holders of U-First accounts. Bank of Ireland 365 offers lower rates a 1.1 per cent APR discount for online lending.
Is it better to go for a fixed interest rate or a variable one? As the consensus is that interest rates are on a gentle upward path, a fixed rate which offers certainty about outgoings may be the best bet.
The Independent Consumer Guide to Personal Loans and Credit, is a useful free guide available from IFSRA, as is its Personal Loans Cost Survey, August 2004, which will be updated every six months.
Both of these are available from www.itsyourmoney.ie