Since the banks tightened their lending policies, car manufacturers have stepped into the breach, setting up Irish-based finance houses to lend directly to customers
If you’ve been on a car dealership forecourt lately checking out a possible purchase for the new year, you might have been entranced by all the special offers available. But what does “0 per cent finance” or “€99 a month” for a new car mean? Are the deals available as good as they first appear, or should you look to your local credit union?
If you have been considering getting finance for a new car, you were likely looking at a hire purchase (HP) agreement.
There are many advantages to securing your new purchase this way, the most obvious one being that it is available – which is not something that can be said about a lot of types of finance in this environment. Since the banks tightened up their lending policies, car manufacturers have stepped into the breach, setting up Irish-based finance houses to lend directly to customers.
Last year, for example, Renault opened a branch of RCI Banque to finance purchases, while Volkswagen has its own bank ready to finance those looking to buy its vehicles. Others have linked up with the domestic banks. Ford operates its Ford Credit arm in conjunction with Bank of Ireland Leasing, as does Toyota.
Secondly, when compared to traditional personal loans, they can appear good value, with some manufacturers offering loans at 0 per cent on all new cars in their fleet.
Over at Volkswagen, the APR on Polos and Golfs is just 3.9 per cent, or 4.9 per cent on other cars in the range, while if you’re in the market for a new Ford Focus, which retails at €19,465, Ford is running an offer of a fixed rate of 4.9 per cent.
Bank of Ireland offers a rate of 8.6 per cent on amounts over €20,000, or 10.5 per cent for amounts between €7,000 and €15,000.
And as HP deals take more of a hold on the market, other options, such as personal contract plan (PCP), are emerging. Popular on the Continent, these arrangements are offered by manufacturers such as Volkswagen, and allow you to part-exchange your vehicle for a new one at the end of a HP agreement. The other options are to complete the agreement and take ownership of the car, or return the car to your dealer.
So far so good, but while HP agreements may serve their purpose, you need to understand exactly what they involve before signing up for one.
The main point to remember when it comes to HP arrangements – be it for a fridge, caravan or a car – is that you don’t own the asset until the last payment is made. So, three years and €12,000 or so later, if you can’t keep up the payments you stand to lose both the car and all the money you have spent thus far on it.
If you bought the car outright, you always have the option of selling it if you run into financial trouble. But with HP this isn’t an option.
In some ways it’s like those rent-to-buy schemes on certain properties. Like renting a property, you get the use of the car, but never own it – until that last payment is made. Fail to make it and you fail to own the car.
If the arrangement isn’t working out as planned, or if you have other plans such as emigrating, it is possible to end the agreement early and give back the car under the “half rule”. The name of this rule can be confusing because, while you are entitled to give back the car without having paid half of its purchase price, you are on the hook for it. So, if an agreement was valued at €15,000, and you gave back the car having only repaid €5,000, you will have to come to some arrangement to repay the outstanding €2,500. So you’re repaying a car loan where you no longer have use of the car.
With so many people running into financial difficulties, abandoning a car that was originally acquired on hire purchase, or trying to sell it on, has become more commonplace.
So if you’re buying a car second-hand, it might be worthwhile checking the ownership history of it first. For between €9.99 and €14.99 you can get a finance report from HPI First, which maintains a record of all finance and HP agreements in Ireland.
Some HP arrangements are structured with a “balloon” payment, which means you pay less at the start of the deal, but then pay a larger payment at the end of the term. If you feel your financial circumstances should improve in the coming years, then such a deal might be appropriate for you.
However, the risk of opting for a balloon payment is that you won’t have the money to meet it, and will end up losing your car. In addition, that payment might end up being more than the actual value of the car.
The other disadvantage when buying a car under a finance agreement is that you won’t get the discount you might have otherwise done so when buying with cash.
And while the offers available might sound tempting, there are terms and conditions.
For example, you will need to have a hefty deposit to qualify – 30-50 per cent at Opel, or 50 per cent at Toyota. Volkswagen has a lower threshold at 10 per cent.
And watch out for the small print. At Ford, for example, additional fees of €63.49 and a once-off purchase instalment of €63.49 apply, while at Volkswagen similar fees are €75 respectively. You’re also likely to find terms tend to be shorter than a five-year bank loan, with Toyota offering a term of just three years on its HP offer.
So if a HP arrangement is unpalatable, what are the other options?
Traditionally, this was a regular personal loan.
Now, however, unsecured personal loans can be tricky to come by, as banks try to protect their balance sheets.
Unsurprisingly then, if you go to your bank to look for a personal loan for a car purchase, you might be offered an asset finance-type deal instead. After all, from a bank’s perspective, a hire purchase arrangement is even safer than mortgage lending because they don’t even have to legally repossess the car – they will own it right up to the last payment. And many will charge a fee for doing so, of the order of about €300.
If you do succeed in getting a personal loan, however, be prepared to pay more for the luxury of owning your car right from the outset.
While we might be in a historically low interest rate environment at present, lending rates for personal loans are looking more like those for credit cards – before they were also ratcheted up.
Take the example of a €10,000 loan over five years. National Irish Bank looks the best at the moment, with a fixed rate of 10.8 per cent, meaning monthly repayments of €213.95 or the total cost of the loan will come to €12,836.86.
Another option is to go with AIB, which has a rate of 11.91 per cent, so monthly repayments will be €218.95 and the total loan cost will be €13,137.02. However, this is a variable rate so you do stand the risk of it rising at the whim of the bank.
Last – but far from least – is the credit union. While rates differ across the country, credit unions typically tend to offer lower rates for motor loans as opposed to personal loans used for other purposes.
St Columba’s Credit Union in Galway, for example, has a personal loan rate of 11.94 per cent – but charges just 6.5 per cent on car loans. Similarly, Enniscorthy Credit Union in Co Wexford offers an attractive rate of 6.9 per cent. While building up savings in a credit union can help improve your attractiveness for a loan, getting it will ultimately depend on your ability to repay.
Value for money the options
Looking to buy a new Volkswagen Golf?
Retail price: €19,245
Option 1
Hire purchase(APR: 3.9%)
Monthly repayment: €321.00
Cost of credit: €1,163.08
Related fees: €150
Option 2
Personal loan(APR: 10.8% )
Monthly repayment: €366.79
Cost of credit: €3,360.80
Option 3
Credit union(APR 6.5%)
Monthly repayment: €337.82
Cost of credit: €1,970.34
Above examples are based on a deposit of €5,000 and a term of four years.
