Once you have taken a test drive in your shiny new motor it can be easy to throw caution to the wind and not worry too much about how you are going to pay for it. So the Competition and Consumer Protection Commission (CCPC) has a snapshot of some of the ways to pay for your car.
1) Personal Contract Plan (PCP)
A PCP is a contract between you and the finance company that will mean for at least three years, or the length of the contract, you will be making repayments on the car.
A PCP may have relatively small monthly repayments, which can make the plan seem more affordable.
A PCP normally involves three payment stages:
- Paying a deposit – this is normally 10-30% of the value of the car
- Paying monthly repayments – which are usually relatively small
- Paying a large final payment – this may be called the “guaranteed minimum future value” (GMFV) or “balloon payment”.
As with hire purchase, with a PCP you are not the legal owner of the car, so you cannot sell it if you run into problems making your repayments.
However, you can end a PCP at any time and avail of what is called the ‘half rule’. The half rule allows you to return your car but you have to pay half the purchase price.
If you have not yet paid half the purchase price you can still return the car but you will owe the difference between the payments you have made and half the purchase price.
When you come to the end of the contract you can pay the final payment- a large once-off payment - and keep the car, hand back the car and make no further payments or trade in the car for a new one.
If you decide to trade in the car the garage you are dealing with will decide what, if any, equity you may have built up to put down as a deposit towards a new PCP.
You should think about what you will do at the end before you sign the contract. The contract can also include commitments from you on things like annual mileage and maximum mileage allowed.
For instance, there’ll usually be a mileage restriction in the region of 15,000 to 20,000 km per year. If you go over this it will affect the final value of the car and you may have to pay a penalty.
2) Hire purchase
With hire purchase, the garage you are buying the car from usually acts as an agent for the finance company and earns a commission to arrange the finance for you, which makes it very convenient.
When you use a hire purchase agreement to buy a car, the garage sells the car to the finance company. The finance company then rents the car to you for an agreed period of time in return for a set monthly repayment over a number of years.
Hire purchase is different to a personal loan in that you don’t own the car until you have made the last repayment – you are hiring the car for a period of time, typically 3-5 years.
This means you cannot sell the car if you run into problems making your repayments. You may also have to pay a significant lump-sum at the end of the hire purchase agreement if you want to buy the car outright.
Check what you are being offered first and know what you are signing up to.
Saving up for your new car is the cheapest option as you do not have to pay interest on a loan. If you want to buy a car in the future it is a good idea to set up a savings account.
Make sure you get the best interest rate on your savings by checking out the CCPC’s regular savings account comparison. Rates from different providers can vary by a few percent so make sure you compare the different accounts among banks and the Credit Union.
If you need a car and don’t have savings, you might be thinking of taking out a loan.
Check out the CCPC’s personal loan cost comparison to compare interest and repayments on loans from all the main lenders and how long it will take you to pay it back. The cost of credit can vary by more than €1,000 between different providers for a €13,000 loan over three years.
Use the interest rate - known as annual percentage rate (APR) - to compare loans. The lower the interest, the lower the cost of the loan, but make sure you are comparing loans over the same time period.
A car loan shouldn’t last for longer than you will have the car. Otherwise, you could end up borrowing for your next car before you have paid off the loan for the last one.
Remember, Credit Unions also offer loans for their members. You can use the CCPC’s loan calculator to work out repayments on loans of different amounts.
Want to find out more? – read the CCPC guide to paying for your car.