A few years ago, not only could consumers not afford to buy a new car, it was nearly a crime to be seen driving around with a shiny reg plate. Car sales are on the up though and the good news is that if you are planning on buying a 152 car reg, you won’t get quite so many looks from the neighbours (or so we hope).

When it comes to getting the best price for your new or second-hand car, consumers are often focused on the price they can get from the dealer, bartering until they are blue in the face. However, if you don’t have the cash to pay for the car outright, then getting the best price possible for your credit is equally important. In fact, it could save you a lot more than the money you spend so much time bartering for.

Repayment Rates

In a bid to get the new wheels on the road though, not all consumers are focused on their repayment rates. Research carried out by Ignite Research for Volkswagen Ireland ahead of the release of its 152 registrations, shows that more than a quarter (27%) of consumers surveyed have no idea what interest rate they are paying on their motoring finance.

This is concerning, especially as shopping around can make a huge difference. For example, if you planned to get a car loan with Bank of Ireland, you could be facing interest rates of 12.8% APR in your branch (11.5% APR online), while AIB will be charging you 12.99% APR for loans less than €10,000, or 9.99% APR for loans above that amount.

Permanent TSB is offering rates that are a bit more competitive at 8.8% APR for cars registered between 2013 and 2015.

So let’s put these up against the rates that you might be offered from a dealer. For example, if you had your eye on the 152 Golf Highline, you could be looking at rates of 1.9% APR. That’s a significant difference. And while you are there, you’ll get a free technology pack worth €1,000 thrown in, which includes a whole range of fancy extras, such as a navigation system, a rear reversing camera and media-in function for your iPhone. Pass us the pen and sign us up, right? Seriously, when you see the numbers you might be questioning where could it go wrong?

Don’t Sign Your Life Away

However, before you sign your life away, you need to be aware that taking a car loan from a bank or a Credit Union is a very different financial agreement than taking finance from a dealer, no matter how attractive it is. Dealers usually offer hire purchase agreements or personal contract plans (PCP).

And whatever about consumers not knowing the rate of interest on their loans, Fergal O’Leary, director of consumer contacts and insights with the Competition and Consumer Protection Commission (CCPC), says they receive a significant amount of calls from consumers who don’t even know what a hire purchase agreement is, never mind the fact that they had one. Hire purchases aren’t necessarily a bad financial agreement and can be a much cheaper option, as our example below demonstrates. However, Fergal says it is essential to know what is involved and what it really costs.

“With a Credit Union or a bank you sign for your car loan. The money is then yours and you buy the car outright with it. A hire purchase agreement on the other hand is where a dealer sells the car to a finance company and they then rent the car to you in return for a set monthly payment. The car isn’t actually yours. The finance company is the owner and you are the hirer.”

Is the Car really yours?

So why do so many people take out hire purchase agreements? Fergal says: “They can work perfectly well if you make all your repayments on time, it’s simply a different type of financial contract.”

However, it’s when people have trouble making repayments that they really run into problems. For example, if you couldn’t make the repayments on your Credit Union loan you can always sell the car and pay it back with the money that you made from the sale. However, with a hire purchase agreement, the car is not yours to sell.

You are protected though by the half rule from the Consumer Credit Act 1996. This means that if you can’t make repayments, you are only liable to pay half the value of the car. However, if you have only paid for a quarter of the car and you must return it, you’ll be still footing the bill for the remaining 25% long after the car has being taken away.

While this situation is rare, it is important for consumers to be aware of this element of hire purchase before they sign their name.

Paying the Price

However, what is relevant to all consumers is the price of the agreement. The APRs for hire purchase can look very attractive, much more attractive than rates offered by the banks or credit union. However, consumers need to look at the overall cost.

“With hire purchase agreements, the repayments will often seem quite low and they are because you might be paying a big deposit up front or a balloon payment at the end. A balloon payment is a large payment that is due at the end of the PCP. People either pay this or upgrade their car and start a new payment plan,” says Fergal.

However, it is important to know about all these elements to the hire purchase agreement. Be very clear on:

  • • What is the deposit.
  • • What are the monthly repayments.
  • • Is there a balloon payment at the end.

    • Ask the dealer about all these variables, so you can work out the total cost yourself and not be distracted by an attractive APR.

    For example

    Golf Highline 152 model.

    Price of car (including delivery): €26,100

    VW Finance

    APR rate: 1.9%

    Monthly rental: €742

    Cost of credit: €765

    Total HP price: €26,865

    Bank loan

    APR rate: 9.5%

    Monthly repayment: €831

    Cost of credit: €3,827

    Total car price: €29,927