Many of the new and used cars sold in Ireland today have some sort finance involved. The finance might be in the form of a bank or credit union loan, finance from the dealership, leasing, credit card or the reliable “bank of mum and dad”. Nowadays, few people actually buy a car with their own cash.
A generation ago, a private car buyer with the equivalent of €10,000 cash to spend would have bought a car up to the value of €10,000. In 2015, that €10,000 is 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.
Car companies are now claiming that upwards of 70% of car purchases are being made on finance of some sort. You will see lots of companies offering car finance options as they profit from enthusiastic buyers’ desires to have the latest and highest specification car available within their estimated monthly cashflow limits.
The appeal of financing a car is obvious – you can buy a car which costs a lot more than you can afford up front. The aim is to manage the small monthly repayments over a period of time.
Many car buyers don’t seem to realise that they usually end up paying far more than the face value of the car. They don’t read the fine print of car finance agreements to understand the implications of what they’re signing up for.
You need to be aware of the full implications of financing a car, keeping in mind the entire costs over the complete term of the finance. Don’t be afraid to ask what might appear to be the stupid questions when discussing the finance options for your new car. That’s much better than finding the expensive answers a year later.
Finance through the dealership
Car dealers are increasingly offering car finance options as part of the deal to buy a new car. This year, there are many options and deals offered to encourage you to complete the finance deal in what is seen as a convenient way at the dealerships.
Tempting offers of free servicing and higher discounts may be made as part of many of the new Personal Contract Plan (PCP) finance offers. 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
Hire purchase (HP) is quite like a mortgage on your house. 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 way of financing a new car is well established, but is now starting to lose favour against the PCP option being widely promoted by car dealers.
There are several benefits to HP:
It is simple to understand (deposit plus a number of fixed monthly payments).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 a HP compared to 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 a long time, that is longer than the term of the finance deal and 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
Personal Contract Plans (PCPs) are often given other names by the car manufacturer finance companies – these include BMW Select, Volkswagen Solutions, Toyota Flex, etc.
This type of finance is becoming more popular as car companies are selling it hard, but it is more complicated than a HP.
Most new car finance offers attractively advertised with the latest models these days are PCPs. The car dealer will try to push you towards a PCP over a HP because 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 GMFV (Guaranteed Minimum Future Value). 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 out the remainder. This means that in practice you have been renting the car the whole time.Pay out the remaining amount owed (the 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. This option usually leads to…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 usually have to fund a minimum of a 10% deposit with each PCP.The PCP is best suited for people who want a new or nearly new car and intend to change it at the end of the agreement or possibly even sooner. You are not tied into going back to the same manufacturer or dealership for your next car, as any dealer can pay out the finance for your car and conclude the agreement on your behalf. It suits car buyers who want a more expensive car with a lower cashflow than is usually possible with a 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 (the 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. This is why many car buyers opt for replacing it with another car and another PCP.
And that’s the reason why car dealers love a PCP, because it keeps you coming back every three years rather than keeping your car for a longer five to 10-year term.
Here we look at PCP car finance examples for two popular cars, the Volkswagen Passat and the Toyota Avensis. Volkswagen provides the finance through its own Volkswagen Bank, while Bank of Ireland Finance operates the PCP scheme for Toyota Ireland.
PCPs such as this are worked out on the car’s future value (how much it will be worth at the end of the contract). Volkswagen’s PCP finance package states the £33,740 Passat will fetch £13,196 in three years, or 40% of its value today. So buyers borrow the difference between the price now and what it’ll be worth in three years. In this sense, you’re paying for the cost of the depreciation plus a little bit extra.
The Passat’s total cost is calculated as follows: the buyer puts down a £3,374 deposit, makes 36 payments of €544.70 (€19,609.20 in total). That adds up to €22,983.20, or €638.42 a month.
And remember that you still don’t own the car at this point. To do that, you must pay €13,196 extra at the end of three years. This puts the final reckoning for the Passat at €36,179.20, or €1,004.97 a month over the three-year period. That’s just not quite as attractive as that €544.70 headline figure.
The Toyota Flex PCP finance package states that the £29,495 Avensis will be worth £11,503 in three years, or 39% of its value today. Using the same approach as with the Passat, the total cost of the Avensis is calculated as follows: the buyer puts down a £2,949 deposit, makes 36 payments of €519.71 (€18,709.56 in total). That adds up to €21,658.56 or €601.62 a month.
To own the Avensis at the end of three years, you must pay €11,503 based on the guaranteed future value. This puts the final cost for the Avensis at €33,161.56, or €921.15 a month over the three-year period. Again, that’s just not quite as attractive as that €519.71 headline figure.
Many of the new and used cars sold in Ireland today have some sort finance involved. The finance might be in the form of a bank or credit union loan, finance from the dealership, leasing, credit card or the reliable “bank of mum and dad”. Nowadays, few people actually buy a car with their own cash.
A generation ago, a private car buyer with the equivalent of €10,000 cash to spend would have bought a car up to the value of €10,000. In 2015, that €10,000 is 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.
Car companies are now claiming that upwards of 70% of car purchases are being made on finance of some sort. You will see lots of companies offering car finance options as they profit from enthusiastic buyers’ desires to have the latest and highest specification car available within their estimated monthly cashflow limits.
The appeal of financing a car is obvious – you can buy a car which costs a lot more than you can afford up front. The aim is to manage the small monthly repayments over a period of time.
Many car buyers don’t seem to realise that they usually end up paying far more than the face value of the car. They don’t read the fine print of car finance agreements to understand the implications of what they’re signing up for.
You need to be aware of the full implications of financing a car, keeping in mind the entire costs over the complete term of the finance. Don’t be afraid to ask what might appear to be the stupid questions when discussing the finance options for your new car. That’s much better than finding the expensive answers a year later.
Finance through the dealership
Car dealers are increasingly offering car finance options as part of the deal to buy a new car. This year, there are many options and deals offered to encourage you to complete the finance deal in what is seen as a convenient way at the dealerships.
Tempting offers of free servicing and higher discounts may be made as part of many of the new Personal Contract Plan (PCP) finance offers. 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
Hire purchase (HP) is quite like a mortgage on your house. 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 way of financing a new car is well established, but is now starting to lose favour against the PCP option being widely promoted by car dealers.
There are several benefits to HP:
It is simple to understand (deposit plus a number of fixed monthly payments).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 a HP compared to 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 a long time, that is longer than the term of the finance deal and 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
Personal Contract Plans (PCPs) are often given other names by the car manufacturer finance companies – these include BMW Select, Volkswagen Solutions, Toyota Flex, etc.
This type of finance is becoming more popular as car companies are selling it hard, but it is more complicated than a HP.
Most new car finance offers attractively advertised with the latest models these days are PCPs. The car dealer will try to push you towards a PCP over a HP because 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 GMFV (Guaranteed Minimum Future Value). 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 out the remainder. This means that in practice you have been renting the car the whole time.Pay out the remaining amount owed (the 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. This option usually leads to…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 usually have to fund a minimum of a 10% deposit with each PCP.The PCP is best suited for people who want a new or nearly new car and intend to change it at the end of the agreement or possibly even sooner. You are not tied into going back to the same manufacturer or dealership for your next car, as any dealer can pay out the finance for your car and conclude the agreement on your behalf. It suits car buyers who want a more expensive car with a lower cashflow than is usually possible with a 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 (the 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. This is why many car buyers opt for replacing it with another car and another PCP.
And that’s the reason why car dealers love a PCP, because it keeps you coming back every three years rather than keeping your car for a longer five to 10-year term.
Here we look at PCP car finance examples for two popular cars, the Volkswagen Passat and the Toyota Avensis. Volkswagen provides the finance through its own Volkswagen Bank, while Bank of Ireland Finance operates the PCP scheme for Toyota Ireland.
PCPs such as this are worked out on the car’s future value (how much it will be worth at the end of the contract). Volkswagen’s PCP finance package states the £33,740 Passat will fetch £13,196 in three years, or 40% of its value today. So buyers borrow the difference between the price now and what it’ll be worth in three years. In this sense, you’re paying for the cost of the depreciation plus a little bit extra.
The Passat’s total cost is calculated as follows: the buyer puts down a £3,374 deposit, makes 36 payments of €544.70 (€19,609.20 in total). That adds up to €22,983.20, or €638.42 a month.
And remember that you still don’t own the car at this point. To do that, you must pay €13,196 extra at the end of three years. This puts the final reckoning for the Passat at €36,179.20, or €1,004.97 a month over the three-year period. That’s just not quite as attractive as that €544.70 headline figure.
The Toyota Flex PCP finance package states that the £29,495 Avensis will be worth £11,503 in three years, or 39% of its value today. Using the same approach as with the Passat, the total cost of the Avensis is calculated as follows: the buyer puts down a £2,949 deposit, makes 36 payments of €519.71 (€18,709.56 in total). That adds up to €21,658.56 or €601.62 a month.
To own the Avensis at the end of three years, you must pay €11,503 based on the guaranteed future value. This puts the final cost for the Avensis at €33,161.56, or €921.15 a month over the three-year period. Again, that’s just not quite as attractive as that €519.71 headline figure.
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