Finding just the perfect car can be time consuming and part of that challenge is deciding how to pay for it. We want to help make that challenge easier by walking you through the different Car Finance options available to you.
Annual Percentage Rate (APR)
Before we start with looking at the different finance options, first lets start with the basics. APR stands for Annual Percentage Rate & it’s the official rate that helps you understand the cost of borrowing. In the simplest terms, if you were to borrow €100 at a rate of 9 per cent APR over the course of one year, then you would pay around €9 interest on that loan – so you would borrow €100 and pay back €109.
The APR % rate that is offered can vary from different financial institutions - Typically, it is in the 6%-9.9% bracket for used cars. Although new cars may qualify for a lower rate. All credit lenders are legally obliged to tell you what their APR figure is before you sign any paperwork.
Hire Purchase (HP):
This is the most common method of buying a car. You pay a deposit of your choosing (normally 10%) or you can choose to pay no deposit at all on some deals. You then pay monthly finance on the rest of the car’s value, plus interest (set by the amount of APR). It’s like going to a third-party finance lender, such as a bank, and asking for a loan of, say, €25,000 to buy a car, and then paying that €25,000 plus interest back over a period of time; it’s just that the car manufacturers will provide HP themselves, through the financial arms of their business. With HP agreements you can choose to spread your payments over anything between one and five years – although different time limitations might apply with different car dealers & the age of the car.
Why is it a popular choice ?
There are no conditions on HP agreements regarding mileage or condition. You borrow the price to change for the vehicle and agree to pay XX per month over the agreed period of the HP.
Things to be aware of
There are fewer choices at the end of an HP agreement because basically, you’re buying a car in its entirety – it’s simply that you’re spreading out the payment for the car over a number of years. The APR rates offered by the manufacturers’ financial services will normally not be as competitive as the APR rates you’d get from a bank or other lender, although this can change, especially around new registration periods when manufacturers offer multiple incentives on HP (& PCP, too) in order to encourage new car sales. The Hire purchase attached to the vehicle must be cleared in order to sell this onto another party (settlement).
Personal Contract Plan (PCP)
This has become very popular with car buyers in recent years. With PCP, you pay a deposit of your choice, which can be anything between nothing and up to (typically) 35 per cent of the value of the vehicle’s list price plus any optional extras chosen. You then choose the length of time you wish to keep the car (usually 3 years), plus how many kilometres per annum you’re going to cover and, from this the car company’s financial department works out what the vehicle will be worth as a minimum at the end of the agreement; this is called the Guaranteed Minimum Future Value (GMFV) and it’s an important figure – so, for example, if you say you want a car over three years and you’ll do 10,000km per year, the GMFV will be based on what financial experts predict that particular model will be worth when it’s three years old with 30,000km on the clock. Optional extras fitted can positively affect the GMFV, hence why they’re taken into account when calculating the PCP. Please note that your vehicle will be valued by the salesperson at that time as normal. If there is a settlement or GMFV owing on this car it will be deducted from to trade-in evaluation and any equity will be carried over into your next deal.
At the end of the PCP deal you will have three options:
Why is it a popular choice ?
You structure a deposit that suits your budget within the deposit percentage allowed. If your trade has a value greater than the maximum deposit percentage, you can avail of Cashback. This allows you to have lower monthly payments because of the GMFV amount being placed at the end of the agreement. PCP has a very competitive APR rate compared to HP, therefore allowing you to drive a newer or higher spec’d vehicle.
Things to be aware of
The finance company will enforce the agreed annual mileage limits. So if you exceed it during the agreement, then you may pay a penalty fee that is based on a cents-per-kilometre basis. The car also needs to be in reasonable condition when you hand it back, with no kerbing to the alloys, scratches to the bodywork or excessive wear and tear or staining to the interior, otherwise you face further costs. And, unless you decide to make the sizeable Optional Final Payment, then despite the large amount of money you outlay in deposit and PCM payments, you’ll never actually officially own the car as the contract price has not been repaid (The full price of the vehicle when you bought it). Additionally, if you only get the GMFV for the car at the end of the agreement and you want to go on to do another PCP on a new car, you will have nothing of monetary value from the first deal to place down on the second PCP as a deposit.