Motors Feature: car financeIt is important to think carefully about how you can finance your new car, writes Mary O'Dea
In the excitement of getting a new car, it can be easy to focus completely on the metal and gadgets, and neglect the somewhat less interesting issue of how and where to borrow the money.
What you need to remember is that you are making two separate decisions - one about the car and another about how you borrow the money. Many of us have been offered car finance by a car dealer, but you need to consider whether this is really the best option for you.
It can be convenient to get the car and finance from the same place, but you don't have the opportunity to shop around and get the best deal you can. After all, you wouldn't buy a car without shopping around, so why not do the same for the financing?
As well as getting the best deal, it is important that you find out what sort of agreement you are getting into. Very often, when garages and lenders talk about "car finance", they are referring to hire purchase. It can be easy to inadvertently sign up to a hire purchase agreement without knowing how it differs from a personal loan.
With a hire purchase agreement, you pay back a set amount at a fixed rate of interest each month. However, with these agreements you are paying for the hire of the goods over a set period of time, so you will only own the car when you make the final repayment. These agreements are generally not as flexible as personal loans, so read any agreement carefully before you sign it.
You may be offered a "buy now, pay later" deal, which could offer interest-free credit for six or 12 months, so the monthly repayments quoted may be low. However, these deals usually have conditions attached - sometimes the last monthly payment is much higher than the other payments and if you cannot pay it in full by the set date, you could find yourself locked into a three, four or five-year hire purchase agreement. Also, if you decide to end an agreement early, it is more complicated than repaying a personal loan and, depending on how many repayments you have made, it can be expensive.
Hire purchase agreement documents must contain certain information, for example the cash price of the car, the deposit needed, the number of instalments and the full hire purchase price (cash price plus interest).
The agreement must also contain the words "Hire purchase agreement" in a noticeable place, and information on fees and charges for ending the agreement early or falling behind on repayments.
Before you take out a hire purchase or "car finance" plan, see what personal loans you can get with a bank, building society or credit union. With personal loans, you borrow an amount of money for a set period of time and make regular repayments, which include interest on the loan.
Unlike hire purchase agreements, interest can be at a variable or a fixed rate. If your interest rate is variable, you may be able to pay back extra when you want to, either regularly or as a one-off lump sum. This can help you pay back your loan earlier, which will save you money on interest. Use the loan calculator on www.itsyourmoney.ie to figure out what your repayments would be depending on the amount you borrow, the interest rate, and the term of the loan. And remember, when you buy a car using a personal loan, you own the car immediately - this means that you can sell the car to pay back the loan if you need to.
If you're still not sure whether you want a car finance agreement or a personal loan, compare the full costs and the terms and conditions of each option.
Whatever type of finance you do choose, you should try to borrow your money over the shortest possible term. Borrowing over a longer term means you will have lower monthly repayments. However. the loan will cost you more in the long run, because you will be paying more in interest, meaning your new car will be more expensive than you thought.
o Mary O'Dea is consumer director at the Irish Financial Services Regulatory Authority