Buying a new car is a significant expense for any family and, as few have that bundle of cash, it is usually necessary to borrow. That funding may take the form of a bank or credit union loan, finance from the dealership, leasing, credit card or the Bank of Mam and Dad. Even after that, it will often be necessary to have savings for the deposit, depending on the type of car loan used. A lump sum of €10,000 is now more likely to be used as a deposit on a car worth thousands more and then followed by up to five years of monthly payments.
The appeal of bank financing to buy a car is obvious; you can buy a car which costs a lot more than you could afford as a single up-front payment. The aim is to manage the small monthly repayment amounts over a period of time.
This means that over the period of the loan you will end up paying far more than the face value of the car.
Tease out the entire costs over the full term of the finance. Be clear about what you are getting into and don’t be afraid to ask questions.
Car companies claim that more than 70% of new car purchases are being made on finance schemes. As we come to the end of 2016, you will see lots of companies offering 171 car finance options.
More and more car dealers are offering car finance options as part of the deal to buy a new car.
The finance deals can include tempting offers of free servicing and higher discounts. There are now two main types of car finance offered by car dealers for private car buyers: the hire purchase (HP) and the personal contract purchase (PCP).
Hire purchase
In HP loans, you pay a deposit up-front and then pay off the rest over an agreed period (usually 18 to 60 months). Once you have made your final payment, the car is officially yours. This traditional way of financing is now starting to lose favour against the PCP option, which is widely promoted by car dealers. There are several benefits to a hire purchase.
It is simple to understand (deposit, plus fixed monthly payments). Also, the buyer can choose the deposit and the term (number of payments) to suit their needs. You can choose a term of up to five years (60 months), which is longer than most other finance options. You can usually cancel the agreement at any time if your circumstances change without massive penalties (although the amount owing may be more than your car is worth early on in the agreement term). Usually, you will end up paying less in total with an HP than a PCP if you plan to keep the car after the finance is paid off.
The main disadvantage of an HP compared with a PCP is higher monthly payments, meaning the value of the car you can usually afford is less. A HP is usually best for buyers who plan to keep their cars for longer than the term of the finance deal. HP also suits car buyers who have a large deposit, or want a simple car finance plan with no financial sting in the tail at the end of the agreement.
Personal contract purchase
PCP plans are becoming more popular as car companies are selling the idea hard, but it is more complicated than an HP. Most new car finance offers that are attractively advertised with low-interest rates are PCPs. The car dealer will try and push you towards a PCP over an HP as it is more likely to be better for them.
Like the HP, you pay a deposit and have monthly payments over a term. However, the monthly payments are lower and/or the term is shorter (usually a maximum of 48 months), because you are not paying off the whole car, just the depreciation on the car.
At the end of the term, there is still a large chunk of the finance unpaid. This is usually called a guaranteed minimum future value (GMFV). If you want to buy the car at the end of the term, this final payment to secure a vehicle on a PCP term may be several thousand euro and the deposit on the next car may also require a cash injection.
The car finance company guarantees that, within certain conditions, the car will be worth at least as much as the remaining finance owed. Then they will give you three options:
Give the car back: you won’t get any money back, but you won’t have to pay the remainder. In practice, you have been renting the car for the whole time.Pay the remaining amount owed (GMFV) and keep the car: given that this amount could be many thousands of euros, it is not usually a viable option for most people. If it was, they wouldn’t be financing the car in the first place. Part-exchange the car for a new or newer car: the dealer will assess your car’s value and take care of the finance payout. If your car is worth more than the GMFV, you can use the difference, called the equity, as a deposit on your next car. That is the only deposit that you will have from the car to get into a new one, otherwise you will have to fund usually a minimum of a 10% deposit with each PCP.The PCP is best suited to people who want a new or nearly new car and intend to change it at the end of the agreement or sooner. It suits car buyers who want a more expensive car with a lower cashflow than is usually possible with an HP.
The disadvantage of a PCP is that it tends to lock you into a cycle of changing your car every few years to avoid a large payout at the end of the agreement (GMFV). Borrowing money to pay out the GMFV and keep the car usually gives you a monthly payment that is very little cheaper than starting again on a new PCP with a new car.
How GMFV is calculated
The Guaranteed Minimum Future Value (GMFV) is the key to how a PCP works. When you start the finance agreement, the finance company needs to know what the minimum value of the car is likely to be at the end of the agreement. This is predicted by taking into account the car you are buying, the length of the agreement (a car will be worth less after four years than three), and your annual mileage (a car with 60,000km on the clock will be worth less than a car with 20,000km). Make sure that they include a mileage use level that reflects your use level, which is typically higher for rural-based drivers.
The finance company will set this future value quite low. This is because it will be their loss if the value drops below what you owe on the car at the end of the agreement. The idea is that the car should always be worth more than what is owed at the end of the agreement.
Can I settle my PCP early?
Yes, you can. You must remember that the finance company does not guarantee the value of the car against your settlement until the conclusion of the agreement, usually three years. For example, if you want or need to sell your car two years into a three-year agreement, you will have to pay any difference between what your car is worth and what you still owe (called negative equity).
So, if your car is worth €20,000 but your finance settlement figure is €22,000, then you will have to pay the extra €2,000 to clear your negative equity. There is usually a charge to settle a PCP early, but it is not normally large.
Some finance companies also allow you to pay in lump sums during the term, to either reduce your monthly payments or bring the end date forward. Some allow it with no charge, some will charge you for it and some don’t allow it at all. Make sure you check this before you sign up.
Can I voluntarily terminate
my PCP or HP?
The right to voluntarily terminate your regulated HP or PCP agreement should be included in your contract documentation. It is there to protect consumers who can no longer afford their monthly payments. It also provides some protection to finance companies to ensure borrowers can’t simply walk away from their financial obligations at any time.
As long as you repay 50% of the total amount owed (not the total amount borrowed, as you need to include interest and fees), you are entitled to terminate the agreement and return the car to the finance company. If there are no “damages if you have failed to take reasonable care of the car (over and above normal wear and tear)”, you have nothing further to pay.
Buying a new car is a significant expense for any family and, as few have that bundle of cash, it is usually necessary to borrow. That funding may take the form of a bank or credit union loan, finance from the dealership, leasing, credit card or the Bank of Mam and Dad. Even after that, it will often be necessary to have savings for the deposit, depending on the type of car loan used. A lump sum of €10,000 is now more likely to be used as a deposit on a car worth thousands more and then followed by up to five years of monthly payments.
The appeal of bank financing to buy a car is obvious; you can buy a car which costs a lot more than you could afford as a single up-front payment. The aim is to manage the small monthly repayment amounts over a period of time.
This means that over the period of the loan you will end up paying far more than the face value of the car.
Tease out the entire costs over the full term of the finance. Be clear about what you are getting into and don’t be afraid to ask questions.
Car companies claim that more than 70% of new car purchases are being made on finance schemes. As we come to the end of 2016, you will see lots of companies offering 171 car finance options.
More and more car dealers are offering car finance options as part of the deal to buy a new car.
The finance deals can include tempting offers of free servicing and higher discounts. There are now two main types of car finance offered by car dealers for private car buyers: the hire purchase (HP) and the personal contract purchase (PCP).
Hire purchase
In HP loans, you pay a deposit up-front and then pay off the rest over an agreed period (usually 18 to 60 months). Once you have made your final payment, the car is officially yours. This traditional way of financing is now starting to lose favour against the PCP option, which is widely promoted by car dealers. There are several benefits to a hire purchase.
It is simple to understand (deposit, plus fixed monthly payments). Also, the buyer can choose the deposit and the term (number of payments) to suit their needs. You can choose a term of up to five years (60 months), which is longer than most other finance options. You can usually cancel the agreement at any time if your circumstances change without massive penalties (although the amount owing may be more than your car is worth early on in the agreement term). Usually, you will end up paying less in total with an HP than a PCP if you plan to keep the car after the finance is paid off.
The main disadvantage of an HP compared with a PCP is higher monthly payments, meaning the value of the car you can usually afford is less. A HP is usually best for buyers who plan to keep their cars for longer than the term of the finance deal. HP also suits car buyers who have a large deposit, or want a simple car finance plan with no financial sting in the tail at the end of the agreement.
Personal contract purchase
PCP plans are becoming more popular as car companies are selling the idea hard, but it is more complicated than an HP. Most new car finance offers that are attractively advertised with low-interest rates are PCPs. The car dealer will try and push you towards a PCP over an HP as it is more likely to be better for them.
Like the HP, you pay a deposit and have monthly payments over a term. However, the monthly payments are lower and/or the term is shorter (usually a maximum of 48 months), because you are not paying off the whole car, just the depreciation on the car.
At the end of the term, there is still a large chunk of the finance unpaid. This is usually called a guaranteed minimum future value (GMFV). If you want to buy the car at the end of the term, this final payment to secure a vehicle on a PCP term may be several thousand euro and the deposit on the next car may also require a cash injection.
The car finance company guarantees that, within certain conditions, the car will be worth at least as much as the remaining finance owed. Then they will give you three options:
Give the car back: you won’t get any money back, but you won’t have to pay the remainder. In practice, you have been renting the car for the whole time.Pay the remaining amount owed (GMFV) and keep the car: given that this amount could be many thousands of euros, it is not usually a viable option for most people. If it was, they wouldn’t be financing the car in the first place. Part-exchange the car for a new or newer car: the dealer will assess your car’s value and take care of the finance payout. If your car is worth more than the GMFV, you can use the difference, called the equity, as a deposit on your next car. That is the only deposit that you will have from the car to get into a new one, otherwise you will have to fund usually a minimum of a 10% deposit with each PCP.The PCP is best suited to people who want a new or nearly new car and intend to change it at the end of the agreement or sooner. It suits car buyers who want a more expensive car with a lower cashflow than is usually possible with an HP.
The disadvantage of a PCP is that it tends to lock you into a cycle of changing your car every few years to avoid a large payout at the end of the agreement (GMFV). Borrowing money to pay out the GMFV and keep the car usually gives you a monthly payment that is very little cheaper than starting again on a new PCP with a new car.
How GMFV is calculated
The Guaranteed Minimum Future Value (GMFV) is the key to how a PCP works. When you start the finance agreement, the finance company needs to know what the minimum value of the car is likely to be at the end of the agreement. This is predicted by taking into account the car you are buying, the length of the agreement (a car will be worth less after four years than three), and your annual mileage (a car with 60,000km on the clock will be worth less than a car with 20,000km). Make sure that they include a mileage use level that reflects your use level, which is typically higher for rural-based drivers.
The finance company will set this future value quite low. This is because it will be their loss if the value drops below what you owe on the car at the end of the agreement. The idea is that the car should always be worth more than what is owed at the end of the agreement.
Can I settle my PCP early?
Yes, you can. You must remember that the finance company does not guarantee the value of the car against your settlement until the conclusion of the agreement, usually three years. For example, if you want or need to sell your car two years into a three-year agreement, you will have to pay any difference between what your car is worth and what you still owe (called negative equity).
So, if your car is worth €20,000 but your finance settlement figure is €22,000, then you will have to pay the extra €2,000 to clear your negative equity. There is usually a charge to settle a PCP early, but it is not normally large.
Some finance companies also allow you to pay in lump sums during the term, to either reduce your monthly payments or bring the end date forward. Some allow it with no charge, some will charge you for it and some don’t allow it at all. Make sure you check this before you sign up.
Can I voluntarily terminate
my PCP or HP?
The right to voluntarily terminate your regulated HP or PCP agreement should be included in your contract documentation. It is there to protect consumers who can no longer afford their monthly payments. It also provides some protection to finance companies to ensure borrowers can’t simply walk away from their financial obligations at any time.
As long as you repay 50% of the total amount owed (not the total amount borrowed, as you need to include interest and fees), you are entitled to terminate the agreement and return the car to the finance company. If there are no “damages if you have failed to take reasonable care of the car (over and above normal wear and tear)”, you have nothing further to pay.
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