When it comes to the most expensive things we will own, cars are right up there alongside our homes. For many, cars are considered both a large and necessary purchase essential for the smooth running of daily life. This can make the process seem overwhelming, particularly when there seems to be so much at stake.
You have to get your head around terms such as ABS, BHP, AWD and that’s just considering what car to buy. By the time you’re figuring out how to pay for it you’ve got PCPs and HPs thrown into the alphabet soup of acronyms. Not only is it confusing, it can be a bit of a problem when it comes to knowing what consumers are signing up for and if they are getting the best deal.
Joint research between the Competition and Consumer Protection Commission (CCPC) and Economic and Social Research Institute on car finance in 2018 revealed “even when consumers are presented with all of the most accurate and relevant information … consumers are in fact making significant errors of judgment.”
The issue could lie between the gap of being given the information about car finance and actually understanding how it works when it comes to paying it off.
Advice from traditional personal finance sources is to avoid taking out any kind of loan against a traditionally depreciating asset such as a car so save up for a cheap second-hand one to get you from A to B. But life isn’t so clear cut. The pandemic saw it harder to find any “cheap” used cars on the market. Buying a newer, more fuel-efficient car that’s less likely to break down might be a better financial decision for some depending on the circumstances. Sometimes people need a car for work and fast.
So let’s take a look at the main ways of using credit to buy a car so you can understand what each one will mean for your finances before you sign the dotted line.
Personal contract plans (PCPs)
Let’s start with the relatively new kid on the block which has proved popular with Irish consumers thanks to their lower monthly repayments and easy sign-up process. According to the CCPC’s report on the market, “PCPs can address the circumstances in which consumers do not have enough trade-in value to use their car as a deposit for a new one as they generally involve a relatively low upfront deposit, low monthly repayments and a large payment at the end.”
So far, so good. You can get a car usually with a 10 to 30 per cent deposit either paid in cash or taken from a trade-in and the repayments seem lower than hire purchase and personal loans.
But, as the CCPC warns, “in effect, the largest financial burden on the consumer is shifted to the future”.
That’s thanks to something in a PCP called the guaranteed minimum future value (GMFV). The GMFV is an estimate of what the car will be worth at the end of your contract set by the person doing the lending. That figure is set aside and not covered by your monthly repayments which is why they look so friendly. At the end of your contract, usually after three years, you either fork out for the balloon payment to keep the car, give the car back, or roll on to another PCP with an option to upgrade.
For example, Nissan Ireland offers a 3.99 per cent interest rate on new cars purchased with PCPs. According to their example, a Qashqai e-Power SV with an RRP €45,200 (including metallic paint and delivery) could be purchased with a weekly repayment rate of €89.39 over 36 months if the maximum 30 per cent deposit of €13,560 was put down. Total credit costs mean the consumer would pay €3,160.45 more than what they would have if they paid cash for the car. Plus the GMFV of €20,792.00 would also need to be paid at the end of the contract if the consumer intended to keep it.
If the same car was bought through a hire purchase with the same deposit it would attract a much higher weekly repayment of €214.80. The total cost of credit would be cheaper at €1944.99, however.
“We found that the complexity of PCP products had the potential to cause consumers to make incorrect and inconsistent decisions” said Grainne Griffin, director of communications at the CCPC regarding the consumer watchdog’s 2018 research.
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When considering applying for any type of finance, Griffin advises to “first, compare the total cost of credit for each option to see which one is the best value”.
This is a much better comparison tool than shiny low interest rates or friendly monthly repayments which can distract us from fees, balloon payments and other things you might be liable to stump up for.
Then go through the contract with a fine-tooth comb as “PCPs are one of the least flexible forms of credit, and usually come with extra conditions – rules around servicing your car and annual mileage limits, for example”, says Griffin.
Lastly she issued a warning on returning the car and “the half rule”.
“Under the law you have the right to return a car bought with PCP or hire purchase once you’ve paid half the price of the car, and you won’t have to pay the rest,” Griffin says.
“You may also be offered the option of voluntary surrender, but this is likely to be extremely expensive and you’ll end up owing far more money than with the half rule. If you’re returning your car under the half rule, do not sign a voluntary surrender form.”
Sometimes the cheaper credit is upfront the more expensive it may be in the long run if you haven’t read through the contract.
Emma Archer, a spokeswoman for price comparison site Switcher.ie, says it’s important not to get dazzled in the dealership when going for either a PCP or a hire purchase agreement.
“PCP and HP finance options can seem very attractive when you’re eying up your shiny new set of wheels. Finance can be offered in minutes, provided you have a good credit history,” she says.
“If it’s all done in the showroom over a cup of coffee, it’s easy to be lulled into a false sense of security, and crucial details may be missed.”
Instead, don’t let yourself be rushed into an agreement without checking the terms and conditions of the agreement first and seeing if you can get a better offer elsewhere.
“Don’t just settle for the dealership’s finance. Make sure you’re getting a good deal by comparing the interest rates and terms with other car finance companies.” says Archer.
“Consider using a car finance broker to find the best deal.”
Hire purchase
Similar to a PCP, you will legally own your car only once you made the final payment at the end of your lease and the financing is usually sorted at the dealership making it convenient. Interest and fees are likely to be charged increasing the cost compared with buying the vehicle outright.
Unlike a PCP, your repayments will be the total cost of the car minus the deposit so these usually will be higher.
Hire purchase may be “a better option if you prefer to spread the repayments over a period of time without the burden of paying a lump sum at the end”, according to Archer.
Like PCPs and personal loans, HPs will show up on your credit history, which means if you get yourself in over your head and have difficulty paying these back it will most likely affect your ability to get credit in the future. If payments fall into arrears the car could be repossessed and you could also be whacked with a repossession fee of about €300 for the pleasure.
Car loans
These are your standard personal loans offered by the likes of the banks or credit unions. These may take longer to process but “the advantage of a car loan is that no deposit is required, no restrictions are in place, and you can sell the car whenever you want,” says Archer.
“The interest rate may not be as favourable though, so check the terms of the loan carefully to make sure you’re getting a fair rate.”
Croí Laighean Credit Union, for example, advertises a “PCP buster car loan” at a 5.64 per cent APR which offers flexible repayment amounts and longer loan terms but it’s a higher rate than the 3.99 and 3.9 per cent advertised by Nissan and Kia PCPs respectively.
Archer says this type of loan might suit those who use their car “for daily long commutes or all-terrain driving” thanks to the “mileage restrictions or the requirement to keep the car in good condition” attached to PCPs and HPs.
As with most types of lending, the golden rule is to read the fine print and figure out how much you will actually need to pay back at the end of the agreement. Otherwise, you risk being taken for a ride on car finance.
