Financing your New Car

0% interest, 3.9% interest, PCP, free fuel for 1 year, service inclusive for 3 years etc. etc…. The car industry certainly has recovered.

146,672 Irish passenger cars were sold to Irish people last year that is 17.5% ahead of 2015. To compare that to previous peaks, there were approximately 180,000 sold in 2007 and a whopping 220,000 sold in the year 2000.

Some people might suggest that this is a sign the market is overheating and that these levels are unsustainable. If we look across Europe there is suggestion that this is normal. The accepted norm in Europe is that between 7% & 9% of the total registered cars in a market will be replenished each year. In Ireland there are over 2 million passenger cars taxed. That means the European norm applied to Ireland for new passenger car sales would be between 140,000 and 180,000, so 2016 is actually on the low end of normal.  In fact when you consider what this market has been through when it hit lows of 4% there is probably room to suggest they could be selling more cars.

What is interesting is how the Irish purchaser is financing their new car purchase. The car finance market was estimated to be worth almost €2billlion in 2016

Is it any wonder people are comfortable financing the purchase of their cars? The market has worked hard to get people into thinking about how much their car costs on a monthly basis instead of the actual purchase price. This is evident when you walk into showrooms or drive past a garage, they have the monthly repayments plastered everywhere. Gone are the days when we saw actual purchase prices.

But also the cost of finance has been dropping in recent years, it is not unusual to see rates quoted of 4.9%, 3.9% or even 0% finance. This is in part due to the fact that some manufacturers of cars have so much spare cash they will now lend you the money to buy their own cars via their own bank, and in part due to the fact that in general global interest rates are at an all-time low.

The lion’s share of the €1.8 billion of finance done in 2016 was done on PCP’s (personal contract plans).

Personal contract plans are about 3 years old in the Irish market and are considered by lots of people as a simple and cheap way of financing your new car.

They are very attractive. For example if you were to walk into a BMW garage today to buy a 3 year old 3 series and you planned on buying it using a 5 year traditional Hire Purchase agreement you could buy a brand new 3 series instead for the same monthly repayments.

How do they work?

The key is in the fact that the garage works out how much the car will be worth in 3 years’ time and you don’t finance that piece. This reduces your monthly repayments because instead of financing the purchase price less the deposit you pay, you are now financing the purchase price less the deposit, less the value of the car in 3 years’ time.

The rates on a PCP plans are also heavily discounted by the manufacturer. This is because PCP dramatically improves brand loyalty. Think about it in 3 years’ time, the only garage who will stand over the guaranteed value is one of the same manufacturer’s garages. In other words you most likely will get the best trade in by sticking with the same brand of car every time you change.

So reduced repayments and guaranteed future values, what’s the catch?

The major disadvantage for some people is the fact that you don’t own the car until the lump sum payment is made in 3 years’ time under a PCP plan. That is nothing new, we have been living with that for years with a Hire purchase agreements where you don’t own the goods until the final payment is made.

The other caveat you have with PCP is the fact that you have mileage limits, the future minimum value of your car is based on it having no more than X mileage on the clock when you bring it back in 3 years’ time. If you go over the agreed mileage there are penalties and it will affect your guaranteed minimum value.

When you get to maturity you have 3 options, roll the car over into a purchase of a new car and start a new 3 year PCP, pay the balance of the lump sum outstanding and keep the car or hand back the keys and walk away.

Although PCP started in Ireland 3 years ago most people never get to the end of the term. The experience in the industry has been that people have been changing sooner, to  either get into a newer model of the same car or to take advantage of lower interest rates, get a “nicer” car and still pay the same.

Another way you could potentially get caught out with PCP finance is are you being charged more for the car than you would if you bought it without finance. My suggestion to get around this is to tell the garage you are a cash buyer, get close to a deal that way, see what the real price is and then look at the PCP route and compare costs.

If you don’t want to go the PCP route because you are worried about your mileage, are getting a higher sticker price or you just don’t like the fact that you won’t own the car, what other options have you?

Hire Purchase

This allows you to drive the car, has no mileage limitations, there is no guaranteed minimum future value and the rates can sometimes be a little higher than PCP. But you must be aware as we mentioned earlier you still won’t own the car until the last payment is made.

Credit Union or Personal Loan

You will own the car from the start, you will have no limitations on mileage and the future value is not guaranteed. You will probably pay a little more in interest because particularly in the case of a personal loan the loan is not secured on the car, so the bank is more exposed. By doing your finance outside the garage you may get charged more money in interest but it does leave you to do a straight bargain on the sticker price.

Use your savings.

Finance always costs money.  So you might be surprised to hear that if you are paying 0% finance or some other ridiculously low figure you may be better off chasing higher returns with your cash and availing of the finance option. This route isn’t for everybody, particularly if you take the loan and then leave your money on deposit for the 5 years, it makes no sense. But if you have somebody who can advise you on putting your money in a well-constructed well diversified portfolio then it is an option you might consider.  If the loan re-payment is going to put you under pressure then this route probably isn’t ideal, in fact you should probably consider should you be buying the car at all?

 

 

The motor industry has done well in recent years, lower interest rates, and new ways of financing the purchase of cars and no to mention the Diet Coke effect. Years ago somebody in Diet Coke wanted to make it acceptable to walk around the office mid-morning with a diet coke without the office thinking you were hungover. That’s when somebody in marketing came up with the idea of “its 1130, diet coke break” that ad campaign si believed to have double diet coke sales.

I like to imagine somebody in the motor trader sat down a few years back and said how “do we make January happen in July as well” and then we got 132, 142,152,162….  Registrations. Clever really.

 

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