Thinking about buying a car? You can expect generous incentives in the coming weeks as dealers look to tempt you with a spanking new 251 registration plate, or any car newer than yours.
But if you are in the market for a new set of wheels, what’s the best way to pay for it?
As a country, we are taking out more loans in bigger amounts to buy cars, research shows. Some 17,794 car loans valued at €224 million were taken out between April and June this year, according to Banking and Payments Federation figures. In terms of the number of loans, that’s up 12.4 per cent year on year.
The average value of those car loans was €12,605, a 19 per cent increase year on year. And that’s just bank loans: the figures don’t include popular car financing options such as leasing and hire purchase deals.
A car is the second biggest financial transaction most people make. How you pay for it can have a big impact on your day-to-day finances.
Cash is king?
Whether you are buying new or second hand, avoid borrowing if you can, says the Money Advice and Budgeting Service (Mabs). Financing a car from your savings is the cheapest way to pay, with no interest or late payment fees adding to the cost.
“Save for your car and do it in a deposit account with a good interest rate, because that’s the cheapest option,” says Karl Cronin of Mabs.
“If you are borrowing for a car this time, think ahead to the next time you will change your car – can you start putting aside some money now so that you won’t have to borrow so much?” says Cronin.
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And remember if you are planning on buying a new car, you’ll take a hit on depreciation.
A new car will lose between 15 and 35 per cent of its value in its first year, and up to 50 per cent over three years, according to carzone.ie. So if you buy a brand new €40,000 car in January and sell it again in 2028, the depreciation hit could mean the vehicle will have cost you €6,670 a year, or €555 a month – and that’s before your running costs.
Sell your three year-old car for €20,000 and you’ll have absorbed much of the cost for the person who drives it away who will lose far less money to depreciation than you did.
Bank loan
Getting a bank loan is another way to pay – using a car loan or a personal loan. The interest and possible fees mean you’ll pay more for your car. The less you borrow, the cheaper the loan, so putting some savings towards the cost makes sense.
Say you’ve got your eye on Hyundai Tucson costing €40,000 – with €5,000 in savings, you borrow €35,000.
Take out a Bank of Ireland car loan over five years at 6.8 per cent APR and the repayments will be €686 a month. You’ll pay €6,152 in interest over the course of the loan – so your €40,000 car will actually cost you €46,152.
Is taking out a personal loan any cheaper? At Bank of Ireland, the cost of finance is the same for both.
Shopping around banks for the best interest rate will save you money. Take out the same loan with AIB, for example, and the 8.95 per cent APR means monthly repayments of €720. Your €40,000 car will end up costing €48,178. That’s €2,026 more than with the Bank of Ireland.
Some banks offer specific electric car loans but they are not always cheaper. A regular car loan with one bank can cost less than a EV car loan with another.
Don’t take out a personal loan for longer than you intend to keep the car, says Cronin. “If you change your car every three or four years, don’t take out a five-year loan because you will still be paying off that car when you are trying to finance your next car and that’s going to limit your options.”
Compared with other forms of finance such as hire purchase or personal contract plans, bank loans offer more flexibility, says Cronin.
“If things are going well for you, you can pay off the bank loan earlier, or pay a lump sum towards it and save some interest,” he says. “If things aren’t going well, you can always renegotiate the terms, such as reducing payments until you get back on track. You don’t always have those options with other forms of finance like hire purchase or a form of hire purchase called a Personal Contract Purchase (PCP).”
Your monthly repayments will be higher with a bank loan than with a PCP, for example, but the structure means you’ll be repaying the entire value of the car over the period of the loan.
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The upside with a personal loan is that the car is yours from day one. If your circumstances change, you can sell it. That’s not the case with other forms of car finance.
Personal Contract Plan
Personal contract plan (PCP) is a particular type of hire purchase loan offered by car dealerships. It splits the price of the car into seemingly affordable chunks; a deposit, monthly payments and an optional larger final “balloon” payment at the end of the loan period if you want to own the car outright.
This balloon payment is essentially postponing a chunk of the cost until the end of the loan period.
The amount you borrow is decided by the finance company’s prediction of how much the car will depreciate over the term of the deal, usually three years. They also subtract the deposit from this to give them the total amount you’ll owe.
The monthly repayment, which includes interest, is typically lower than a personal loan or a standard hire purchase agreement and that can make it seem like an affordable way of financing a car.
“You have to pay a deposit, which is typically 10 to 30 per cent of the car, and your monthly repayments are quite low,” says Cronin. “That can be attractive, but it’s not going to clear the full price of the car within the term of the PCP,” he says.
You’ll need to budget ahead for the balloon payment. Until you make this payment, you don’t own the car. But for many PCP users, that is never the aim. Unlike a personal loan, you don’t have to pay off the full value of the car with the balloon payment. You can simply renew your PCP contract and get a new car, says Cronin.
“Typically, the consumer goes back to the same dealer to see what they can offer them. The dealer will put a value on the incoming car based on the mileage,” says Cronin. The idea is that this value equates to the deposit required for the new vehicle but that is not guaranteed. “For some, it can become a cycle of three-year PCPs where you never actually own your car,” says Cronin.
PCPs are popular with those who like to regularly change their car, says Jennifer Kilduff of the AA. Renewal rates for PCP buyers run as high as 60 per cent, depending on the brand, according to 2018 research from the ESRI.
“You can keep up with the latest technology and also, should your car requirements change, you can upgrade or downgrade the size and cost of your vehicle to suit your lifestyle.”
Newer vehicles require less maintenance and some PCPs come with service plans, says Kilduff.
You have until the end of the three-year PCP term to decide whether you want to buy the car or not. You may also have the option to refinance the balance and keep the car for longer, or hand back the keys and walk away from the deal – usually subject to fair wear and tear, says Kilduff.
PCPs are complex and you need to know what you are signing up to, says Cronin. There can be rules and obligations around mileage, making modifications, servicing and insurance that don’t apply when you buy with a personal loan.
“You have to mind the vehicle, because essentially, it’s not yours. The finance company owns the vehicle until the last payment is made,” he says.
If you are having financial difficulties, you may be able to sell the car to pay off what you owe, but you need the finance company’s permission. You may also be able to end your agreement using the “half rule”, according to the Competition and Consumer Protection Commission (CCPC).
This limits the amount you are responsible for paying back to half the PCP or hire purchase (HP) price of the car. Your agreement must show this figure and it will include the interest charged.
If you have paid less than half of the PCP or HP price of the car, you can give the car back, and you will only owe the difference between what you have paid, and half of the price of the car.
If you have paid more than half of the PCP or HP price of the car and have not missed a payment, you can end the agreement and hand back the car. You will be responsible for the cost of any repairs.
The finance company may offer you a “voluntary surrender” but this is likely to be expensive and you will end up owing far more money than with the “half rule”. So, if you are returning your car under the half rule, don’t sign a voluntary surrender form, says the CCPC.
PCPs and other hire purchase agreements are the least flexible form of finance, says Cronin and there are extra fees involved too.
“From the outset you have a ‘documentation fee’ with your first payment of €50 to €100. If you miss a repayment, there will be an interest surcharge on it – there is typically a missed payment penalty of €15 to €25,” he says. There is a “completion” fee of €63 to €75 at the end of the term too. Rescheduling the terms of the agreement can be difficult and you’ll be charged a fee for this too.
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If you can’t make the repayments and the car is repossessed, you could be charged a repossession fee of about €300.
Irish consumers don’t understand aspects of PCPs and are unclear about what happens at the end of a transaction, according to the ESRI research. After putting down a deposit, making three years of monthly payments and staying within the agreed mileage limits, many consumers don’t realise they own little or no equity in the vehicle, the research says.
Beware too that, with a PCP, the loan is secured against the car. This means if you fail to keep up with the repayments, you could lose the vehicle, no matter how much you have paid.
