Right, let’s get one thing straight from the get-go – before you embark upon any loan or any sort of car finance, sit down with a calculator and a stern attitude and go through your own finances. Be brutally honest with yourself and work out not just what you can afford now, but what you can afford if, say, you were to be ill for a while, or your partner were to lose their job, or you had a (or another) child or interest rates spiked. If the period of 2008 to 2015 has taught us nothing else, it’s that blundering blindly into finance is a bad thing. It’s a good idea to engage the services of an independent professional by the way – even just chatting with your local bank manager – before making any firm decisions.
So, with the let’s-be-careful-out-there preamble done with, we can delve into one of the current inevitabilities of life – car finance. Along with death and taxes, if you want to get around in your own wheels, you’re almost certainly going to need some sort of finance or loan. Cars are expensive things and few, if any, of us can just march in and slap the asking price down on the table.
Car companies, of course, know this and have been steadily ramping up their finance arms over the past decade. Volkswagen Bank, BMW Financial Services, Renault Bank and more have specialised in loaning out money to car buyers, because it makes perfect sense. Give the people money to buy your products, charge them interest and you make a double profit. Especially during the recession, when the commercial high street banks were effectively moribund, it was the car company banks that were the only realistic option for many buyers.
And from the car company banks first came the PCP or Personal Contract Plan. Originally developed in the nineties by Ford, a PCP is essentially like buying a company car for yourself. You pay a deposit, and then make monthly payments. The beauty of the system is that the car’s future second hand value is taken out of the equation, so you’re effectively only financing the middle bit, the gap between the deposit and the second hand value, and that keeps monthly repayments nice and low. Even a substantial family car, on a competitive PCP, can be bought for monthly repayments of under €300 these days.
The idea of course is that, come the end of the agreement, the value of the car is slightly higher than the Guaranteed Minimum Future Value or GMFV. The GMFV is set by the car maker and is, generally, a slightly pessimistic bet as to what the second hand value of the car will be after three years. Assuming that the value of the car is greater than the GMFV, then there’s enough to pay off the last bit of the finance (called a ‘Bubble Payment’) and a little bit of equity to act as a deposit for the next purchase.
So how does that work, exactly? Simple – the car companies know, within reason, what their cars will be worth in two to three years’ time, and they deliberately set the guaranteed values lower than that level. For example, Hyundai’s recently-launched new Tucson SUV has a predicted value after three years of at least 45 per cent, or in other words after three years it will be worth slightly less than half what you originally paid for it. But, for the purposes of the PCP, Hyundai assumes that the future value with be 39 per cent of the original purchase price. That gives the dealer insulation against any fluctuations in values, and if all goes well, gives you the buyer a little bit of value left in the car to act as a deposit for your next one.
That then gives you three options. You can roll the agreement over into a new car, you can come up with the GMFV payment yourself and keep the car you’ve got or you can hand back the car and the keys and walk away debt-free. It’s simple and hugely effective. PCPs were essentially non-existent in the Irish market half a decade ago, yet now some car makers are reporting that as much as three-quarters of their sales are being financed by a PCP.
It’s not perfect though. The GMFV is hugely helpful, especially as if there is any shortfall in the value; the dealer and car maker have essentially undertaken to make good the gap, so you don’t have to worry about any changes in depreciation – for you, the car will be worth whatever it was decided it would be worth on the day of purchase. The flip side is that you can’t benefit from any value above the GMFV unless you’re rolling over into a new PCP purchase. Indeed, some deals don’t even let you do that and you need to be stashing some money aside while making the repayments to act as your next deposit. It’s a classic case of reading the fine print and knowing what you’re getting into.
Another wrinkle of PCP is that you never actually own the car, you are effectively a custodian of it and that means you have to keep up the maintenance and make sure that dings, scratches and dents are kept under control. You also have to stick to an agreed total mileage, and any kilometres travelled above that limit have to be paid for at trade-in time. More than a few customers have been caught out, assuming they could hand back the keys to a steaming wreck at the end of the deal and walk away debt-free.
So don’t assume that just because PCP is the deal of the moment that it’s right for you. The monthly payments may look tempting but there are those hidden costs, those terms and conditions to deal with. There are sometimes also restrictions about when and how you can trade the car in and selling it privately, hoping to make up the final payments, can be tricky.
For many, a more straightforward Hire Purchase agreement may well be the better option. These can often still be packaged with a final bubble payment to keep down the monthly costs (albeit without the guaranteed bit of the GMFV) and the ownership is more straightforward. When you make the final payment, you own the car and that’s that. In the meantime, there are no restrictions on mileage or upkeep. Almost inevitably though, the monthly repayments will be higher, sometimes significantly so, than on a PCP.
Also with higher monthly payments, but with even more simplicity, is a bank or Credit Union loan. With interest rates still generally quite low, this can make a huge amount of sense. The monthly repayments will likely be significantly higher than on a PCP or a HP deal but then there’s no bubble payment to worry about, and no ownership restrictions – you own the car outright from the moment you sign on the line and hand over the cheque.
A personal loan is probably the best way to buy second hand, not least because the amounts of money involved are generally lower to begin with but also because the predictions of a car’s future value become more difficult as the age and mileage creep upwards. Nonetheless, a great many car makers and some of the larger dealer groups are now offering PCP deals on approved second hand cars, and these are well worth exploring, especially at the premium end of the market where the prices of the vehicles are necessarily higher.
Or you could add the cost of a car onto your mortgage. Yes, I know that sounds like insanity, but it is possible and makes a little more sense that it first sounds. House prices in many areas are on
the up once again, and those lucky few with equity in their dwellings might well fancy their chances at a bit of re-mortgaging. It’s a gamble, of course, but with those low current interest rates you’ll get the money at a much lower cost than all but the very best of the zero per cent finance offers from the car company banks. Make sure you have a good discussion about it with an independent mortgage adviser though.
Finally, let’s have a look at trade-ins. Now, many of us have been highly insulted and more than a little disappointed when we’ve brought our old car into a dealer and been offered what seems to be half-nothing for it. You need to have your expectations in line. Unless your car has a Ferrari or Lamborghini badge, it’s unlikely to have risen in value since you bought it and the valuing of a second hand car in Ireland is still a black art. The industry continues to resist the creation of a publicly available ‘Black Book’ of predicted used values, as has been available in the UK for decades, and that allows dealers to play hard and fast with their valuations.
A good dealer, dealt with honestly, will give you an honest price but you have to remember that there’s more to it than the intrinsic value of the car you’re trading in. It has as much to do with the time of year, and how many other, similar cars the dealer already has in stock. It’s always worth shopping around for the best trade in, but don’t glance at the classified ads and assume that the price of other, similar cars is the value of your own. Prices on adverts are always at the optimistic end of the scale (especially private adverts) and you always have to allow between €1,000 and €2,000 for the dealer to have both a profit margin and to cover the cost of preparing the car for resale. Basically, you need to manage your expectations.
As ever, getting the best deal on car finance is about doing your homework and putting in some legwork. The creaky old cliché of shopping around is as relevant now as it ever was and if you put a little time and effort in at your end, then you could end up saving yourself hundreds, if not thousands of Euro.