It’s that time of the year again when people are considering changing their car and if you are this month or at some time during the year, you will need to know two things: 

• Where can you get the cheapest money should you need to borrow funds and;
• What type of loan should you take out

Let me start off by comparing what the various providers were offering, so earlier this week I called each lender and advised them that I was buying a new car and I wanted to find out my loan repayments would be based on borrowing €10,000 over either a 3 or 4 year term and below is what each quoted me.

Of course you don’t have to arrange your finance through a bank, you can also get access to funds arranged by the dealership usually through a line of credit arranged and funded by the particular brand of car you are buying, and the rates they are offering may be lower than the rates quoted above.

For example, I came across someone last week buying a new Renault and the rate he was being quoted was 3.9%. Another client was buying an Opel and the rate he was being quoted was 3.9% and another was quoted 4.90% if he was buying a BMW and financing it through BMW Financial Services. And there are others as well, Nissan and VW are both quoting rates of 5.9%.

If, you were buying a new car using and availing of those rates and they really are excellent, the monthly cost of borrowing €10,000 over 3 years at 3.9% is €294.80 and €225.34 over 4 years, and whilst the difference may not be life changing compared to what the banks are offering, better in your pocket than theirs I say.

So in some situations it pays to use the garages financing package – but be careful. Some of the garages make more from selling finance than they make on selling the actual car, so before you sign or commit to anything, compare what they are offering and make sure it is the best deal you can get. It can be easy for them to arrange the finance for you, but you could end up paying more than you needed to if you arranged it yourself so check with what a bank will offer you and what the dealer can and compare one against the other, so you know you are getting the absolute best deal.

And the next most important area you need to consider is what type of loan, do you take out, and this is as important, if not even more so than the monthly cost, so let me explain what your options are:

Term Loan:

You typically take out this type of loan with repayment terms ranging from 3 to 5 years. The interest is charged on the amount you borrow from day 1 so your weekly or monthly repayments are based on the amount borrowed along with the cost of this loan, spread out over the term you choose. For example, you borrow €10,000 and the interest over 3 years is €1,500, then your monthly repayment will be €319.44 (€11,500/36)

If you finance the purchase of a car this way, you immediately become the owner of the vehicle which is not the case if you were to finance it in the other ways I am about to show you, so you have much more control for example over the type of insurance you take out, how you maintain the car i.e. you don’t have a limit on the amount of miles you can or can’t drive etc.

Lease:

Hire Purchase

The repayment term for this type of loan is the same as a loan or a lease but the big characteristic with this type of loan is that the car does not become yours until you make that very last monthly repayment so you are effectively hiring the car in the interim until you make that last payment.

And then and only then does the ownership of the car becomes yours outright. You, therefore do not have the option of selling the car and using the money to pay off the balance on your agreement.

The interesting characteristic about a hire purchase agreement is that you can return the car and terminate your HP agreement using what is known as the “half rule”.

When you take out a HP loan, an agreement is drawn up between you (The Consumer) and the owner (The Finance Company) and contained within the Credit Consumer Act of 1995, gives you the right to end the agreement at any time by you giving the finance company notice in writing that this is your intention.

When you sign the loan agreement, the finance company legally must show you the figure for what half the hire purchase of the car is. So, when you have paid half the hire purchase price, you are entitled to return the car to the lender and not be liable for any further payments or suffer any damage to your credit rating.

If you are in a situation where you no longer want or need your car or you simply cannot afford the monthly repayments any longer, then you have a get out option under a HP contract provided you have paid half the hire purchase price.

Personal Contract Purchase (PCP)

PCPs are designed to make it more affordable to purchase a new car. The contract is typically structured so you pay a deposit and monthly instalments over a fixed term. However, unlike a HP or term loan, the payments are typically lower and at the end of the agreement you have the choice of whether to make that final payment and own the car outright, hand back the keys or trade it in for another car – so it’s very similar to a lease agreement.

The difference however, is that a PCP comes with a guaranteed future value (GFV) for the car your purchase and this is treated as the car's final payment so you know exactly what it will be worth at the end of the agreement. This final value depends on the predicted annual mileage of the driver so you can adjust the agreed amount to suit your needs.

The majority of people who take out a PCP contract may be hoping to use the equity in the car to act as a deposit for a new PCP deal and get a new car via this method every few years if of course they have this equity and that is exactly what the dealership want you to do.

Let’s say there is equity, it would work something like this - if the final payment for a car financed through a PCP is for example €12,500, but the car is actually worth €15,000 you have €2,500 in equity that can be used towards a deposit for a new car or you could just return the car with no future obligation.

The key thing when you are borrowing money for a new or used car is to understand what you are undertaking from the outset, rather than finding out a later date when it is too late to do anything about it, when you discover that you made the wrong decision. “If I had my time all over again, I would have done things differently” is something I hear all too frequent, so please don’t let that happen to you. Consider all of your options and then decide which is best for you and this applies in no better scenario than when you are buying a car.