About one in five of Ireland's annual car sales takes place in January when03 still looks very new. John Cradden looks over the many different ways of financing one of life's major purchases
It's nearly January and the time when many of us think about buying a new car. Around one-fifth of annual car sales traditionally take place during the first month of the year when the lure of brand-new plates is too hard to resist.
In January 2002, for instance, over 30,000 cars were sold out of an estimated total for the year of 155,000, according to SIMI.
Of course, few of us have the sort of spare cash knocking about to avoid borrowing large amounts of money to buy ourselves a new car. Enter the world of car finance, with its options ranging from leasing to contract purchase to hire purchase or a straightforward personal loan.
Most potential purchasers will not take any more than a cursory glance at the various options available, preferring to opt for whichever is the easiest and most convenient. However, in these leaner economic times, it does pay to do your homework before you shake hands with a dealer or seller.
Many new cars are linked to particular finance deals and sold as part of a special offer, but this doesn't mean that you can't use other options to finance the purchase of the same vehicle that has taken your fancy. The car and the car finance package are two separate products.
Two of the advantages of a personal loan as opposed to, say, a hire purchase deal, is that with cash, the buyer is in a better position to haggle for a discount and the car is theirs from day one.
Interest rates for loans provided by banks tend to average around 10 per cent, depending on whether it is a fixed or variable rate.
Choosing a variable rate means your monthly repayments can rise or fall in line with interest rates, which are usually kept within the European Central Bank base rate. With a fixed rate, monthly repayments are set over the term of the loan.
It is well worth shopping around for the best variable rate. Interest rates for a car loan of say €15,000 over three years ranged from 7.9 per cent APR to 10.9 per cent APR (Annual Percentage Rate).
The APR is the total cost of credit to the consumer expressed as an annual percentage of the amount of credit granted. The APR on car loans can be determined by any number of factors, including the length of the loan in some cases.
Credit unions, like banks, lend to members according to their means and what they can afford to repay. Interest rates are capped at a maximum of 1 per cent per month on a diminishing balance.
This technically works out at an APR of 12.6 per cent, but the rates can vary quite widely between individual credit unions. In addition, some credit unions give interest rebates at the end of the year and offer greater flexibility with repayments.
One important thing to note when shopping for loans is repayment insurance. Buyers should look very closely at these insurance products before signing up for them.
In many cases, they significantly add to the cost of your loan, and in some cases their value is questionable.
IF you are committed to repayment insurance of some kind, it is very much worth looking beyond the loan provider's product. Consumers will often agree to opt for the loan provider's insurance protection purely because of the convenience.
According to Dermot Jewell, chief executive of the Consumers Association of Ireland (CAI), the loans industry needs to do the same job on consumer awareness about car repayment insurance as has already been done with travel insurance - many customers arrange their own travel insurance far more cheaply than they would if they had bought it from the same travel agent from whom they bought their holiday.
Other car finance options are worth considering depending on how much you will use the car and your situation. There are three main options besides a personal loan - all of which offer their own advantages and disadvantages for different people.
Hire purchase is often arranged through the dealer from whom you may buy your new car. A combination of buying and hiring, the ownership of the car does not pass to you until you make the final payment. In some cases you also have to pay a small option price to buy the car. This method accounts for roughly 40-60 per cent of all new car finance deals, according to anecdotal evidence.
It is important in this case to ask whether there are balloon payments involved, which are optional in some HP products. This makes such deals seem very cheap in terms of the monthly repayments, but it effectively means that the payment for the car is deferred for as long as possible.
There have been many complaints about customers being misled about the exact arrangements involved in HP deals, with some believing that they owned the car outright once the deal was arranged, and were unaware of huge amount they would have to pay to own the car at the end of the loan period.
Such deals often get confused with Personal Contract Purchases, which is a combination of elements of HP and leasing. The difference with HP is that it gives you a number of extra options, including picking a new car and starting a new package, or handing the car back and walking away. You will always need a deposit or a trade-in with a PCP.
Then there is the option of standard leasing, where a customer essentially rents the car over a period of between three and five years. No deposit is required and the monthly fees are determined by the value of the vehicle, its projected depreciation and interest rates. The advantage for self-employed people is that the leasing payments are fully tax-deductible. However, if you do high mileage, leasing or PCPs are not the best option.
As with all these kinds of deals, it is important to check the exact nature of the arrangement, the APR, the cost of the credit, set-up fees, and whether or not there are penalties for early repayments.
In general, there have been few developments in the car finance market over the last couple of years beyond expressions of concern by the Office of the Director of Consumer Affairs over how finance arrangements are explained to customers, and misleading advertisements.
Many customers will agree that the market needs to be shaken up: "The market is being ignored," says Jewell of the CAI. "It's not being challenged to any degree. It requires new outside entrants." He adds that providers are too comfortable with the market, and there are no signs of an outside company coming into the market to "make them struggle".
In Britain, for instance, the AA offers a fixed rate of 8.4 per cent APR on loans of between £10,000 to £15,000, (€15,700 to €24,000) payable over a maximum period of seven years.