Credit car: your guide to borrowing to buy a new vehicle

The new year is fast approaching and with it, for some, the possibility of a new car. But if you’re in the market for a new car – or at least a car that’s new to you – what do you need to know about getting the funds to enable you to do that deal?

Q What are my options for buying the car outright?

A If the easiest and cheapest option – paying for a car with your savings – isn’t open to you, then you will have to stomach some additional costs for borrowing.

A personal loan will allow you to buy the car upfront, which will give you flexibility if your finances should change and allow you to sell the car if you need to. It will also give you greater freedom when you go to choose your car, and will be one of your only options if you want to buy second-hand from someone else, rather than from a garage.

AIB has a rate of 11.9 per cent on personal loans, while Bank of Ireland's best rate is 13.2 per cent. This means that a loan of €10,000 will cost an additional €1,320 in credit costs. However, with the banks tightening the screws on unsecured lending, it might be difficult to come by.

Another option is a credit union loan. Wexford Credit Union is offering a rate of 9.6 per cent on car loans, while Roscommon Credit Union has a typical APR of 9.42 per cent on car loans, so you might save yourself some money by going down this route. Be aware, however, that lending practices have been tightened at credit unions, so they may also be less forthcoming than in the past.

Q Would a hire purchase deal be easier?

A Yes, with HP deals easily available on forecourts across the country, and low interest rates on offer, HP might be the option that suits you best. Before you sign any documents, however, be sure to clearly understand how HP works. The key to remember is that under a HP deal, you won’t own the car until you make that very last payment; you are in effect renting it from a finance company. This means that if you can’t keep the repayments up, you will forgo both the car, and all the payments you have made on it.

Q What HP rates are
available?

A The best rates on the market comes from Peugeot and Volkswagen. The French brand is offering an APR of just 3.9 per cent on sales of its new 5008, while Volkswagen also has a rate of 3.9 per cent.

Or how about a Grand Megane from Renault? Based on an APR of 6.9 per cent, and a down-payment of €6,843, the cost of credit comes to €2,163, which will mean repayments of €199 a month over three years.

Ford is offering a rate of 5.9 per cent, while if you're in the market for a new Toyota Avensis Aura saloon, with a minimum deposit of €1,973 it will cost you €560 over 37 months, at an APR of 7.6 per cent. This brings the total cost of finance €4,171.06.

And, while HP deals are readily available on the forecourts, remember another option is to look for a deal with your bank.

Bank of Ireland, for example, has a rate of 8.6 per cent on amounts over €20,000, rising to 10.5 per cent for loans less than €7,000.

Remember, the longer the term, the more expensive the credit. If you could push the deposit up to €5,000 in the example of the Avensis mentioned above, the cost of finance would drop to €3,815.

And an APR is not the most straightforward approach to comparing HP deals, as other costs can apply. At Renault, for example, a documentation fee of €75, as well as a completion fee of a further €75, apply.

Each deal also comes with its own terms and conditions. At Toyota, you will need to come up with just 7 per cent of the purchase price as a deposit for example, but the maximum term for a HP deal is three years. Over at Peugeot, you can get a loan structured over 5½ years, but you will need a 30 per cent minimum deposit.

Ford requires a minimum deposit of 20 per cent and offers a maximum term of 48 months, although a Mondeo can be structured over 61 months. Volkswagen looks for just 10 per cent of the sale price as a deposit.

Q I'm still not sure. How about leasing a car?

A If you like upgrading your car on a regular basis, then leasing a car might be for you. Since the onset of the recession, car manufacturers have increasingly offered customers this option. Indeed, Audi says that its personal contract plan (PCP) is now the most popular finance option for people buying its cars.

It has its perks after all. You get a new car every three years, you avoid NCT costs and repairs are likely to be kept at a minimum given that you will always be driving a relatively new car.

Ford’s “Options” plan allows you to use a car on a HP agreement, and at the end of the agreement you’ll have three options: 1) complete the agreement and keep the car; 2) part-exchange for a new car; or 3) return the car to your dealer.

A key element of the deal is the “guaranteed minimum future value” (GMFV). This is an estimate of the minimum value of your car at the end of an agreement, and is based on factors determined at the start, such as your annual mileage. On the plus side, it means that you’ll have lower repayments throughout the agreement and if you hand the car back at the end of the agreement, you’ll have nothing else to pay. However, if you want to retain the car, you’ll have to settle the balloon payment first.

The third option allows you to hand back the car, and use any “equity” that may have built up (that is, if the car is valued above the GMFV) to take out a similar agreement on a new car. If this turns out not to be the case however, you will need to find the money for a deposit to fund a new agreement. In the case of a new VW Golf, this will be almost €7,000.

Q My job is still a little bit
insecure – what if I
have to move to Australia halfway through a finance agreement?

A First things first. If you take out a personal loan to purchase a car you can always sell the vehicle to pay off the loan – although you might have a shortfall if the sale price doesn’t hold up.

On the other hand, if you signed up to a HP agreement, then the “half rule” will apply. In principle, this means that once you have reached the halfway price of the vehicle, including the cost of credit, you are entitled to walk away from the deal – first giving back the car, of course. It’s a bit misleading, however, because you can actually give the car back before you reach this point – but you will still be on the hook for half the value of it. So, if an agreement was valued at €15,000, and you gave back the car having only repaid €5,000, you would have to come to some arrangement to repay the outstanding €2,500. This means that you’ll be repaying a car loan where you no longer have use of the car, which isn’t ideal.

If you have a PCP deal, it can get a little complicated also. A spokesman for Ford, for example, says that in the first instance you should talk to your dealer/finance provider about it, but that “most likely, there would be an additional sum due”.