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Examiner1

The optimum way to finance your car

John Hearne looks at the best value on offer when it comes to car loans

If you need to change your car, or if you're buying one for the first time, the first thing you need to do is figure out what you can afford and how you're going to pay for it.

The Competition and Consumer Protection Commission has just brought out a guide for people who need wheels but aren't certain where the finance is going to come from.

The guide - to be found with all of the commission's other great resources - is at consumer help.ie.

There are of course several ways to finance car purchase, from paying cash to getting a personal loan or buying a car on finance.

Before you start checking out the cars themselves, you need to work out how much you can afford to spend. Knowing the figure will cut down on time spent trawling the sites and the dealerships. It will also help prevent you from overstretching yourself and buying something that you can't really afford in the first place.

Cash and savings

The first and best way to pay for a car is through cash and savings. Between tax and insurance, maintenance and fuel, running a car is an expensive business.

Insurance in particular has been climbing steadily over the past two years - it's up by an eye- watering 33% since January 2014.

The point of course is that because running a car really is so expensive, adding loan repayments to the equation will not make life any easier for you. If you can pay up front, you'll avoid all that, plus of course you'll own the car in its entirety without reference to banks or finance companies.

Savings plans

The problem of course is that with interest rates as low as they are and DIRT as high as it is, there's not a great deal of value out there at the moment.

The best regular saver account you'll find is the KBC Extra Regular Saver account, which pays an AER of 4% for sums up to €12,000. There are a suite of caveats and conditions attaching to this offer. You'll have to open up a current account, plus you can't deposit less than €100 or more than €1,000 per month. If you manage to put away €200 per month for twelve months, total gross interest will come to €52.

After DIRT, that comes down to a little over €30. It's not much, but that's about as good as it gets. Personal contract If you don't have the cash, one financing option is the Personal Contract Plan or (PCP). This is similar in many ways to hire purchase.

You pay a deposit, usually between 10%- 30% of the price of the car. If you already have a car, you can trade this in for part or all of the deposit, depending on its value.

You agree the monthly repayments, usually spread out over a term of between three to five years. You then agree what's called the Guaranteed Minimum Future Value (GMFV) of the car, based on things like the estimated annual mileage over the term of the agreement and the condition of the car at the end of the agreement. Once the agreed term is up, you can either hand back the car to the dealer and pay nothing, trade the car in and start all over again with another PCP agreement or pay the GMFV price of the car and keep it.

The advantage of this arrangement - if the dealership makes it available to you -  is that the deposit is small, and the monthly repayments are low. It's also easy to arrange and there's a choice of what to do at the end of the repayment term.

On the downside however, the mileage and condition of the car have a big impact on the cost of the deal, and it's possible that the total amount paid could end up being more than under hire purchase. In addition, you have to pay the outstanding balance to keep the car and the car doesn't actually become yours until the final payment is made.

Personal loan

Then there's the personal loan, which you can get if your credit rating is good enough. Go to price comparison site bonkers.ie, where you can generate a list of all the loan products in the market, together with details of the cost of the credit.

Shopping around is vital here. If you were to borrow €10,000 for four years, the cost of credit will vary by more than €1,300 depending on which bank you go to. Also, check out your local credit union.

Their rates vary from one to the other, but many are highly competitive and are better than you will get with some of the banks.

One thing is vital when it comes to car loans. Aim to have it paid off before you plan to get rid of the car. You don't buy petrol or tyres for a car that you no longer own. Don't end up paying interest on it after you've gotten rid of it.

Budget planning

Use one of the many online budget planners - including at consumerhelp. ie - to work out how much money you have left over at the end of each month based on your current income. Try to be realistic with your repayments so that you won't leave yourself short each month. Remember too that you're going to have to factor in all the other costs associated with owning a car.

Flexible plan

The key advantage of the personal loan is that it's flexible. You can use it to top up your savings or to fund the entire cost of the car.There are competitive quotes out there and of course if you buy with a personal loan, the car is yours from the get go. On the downside, if you miss repayments there will be repercussions, plus approval may not be that straight forward.

Hire purchase

Many of the car finance deals offered by garages - and often by lenders too - are hire purchase agreements.

The key difference between hire purchase and a personal loan is that with hire purchase, you don't own the car until you've made the last repayment.

This means of course that you can't sell the car if you run into problems making your repayments.

With hire purchase, you usually have to pay a deposit of 10% of the value of the car. You then pay the rest in instalments, over a period of between 3 and 5 years. In this way, you are essentially hiring the car until you make your final payment, after which time you own it.

Secured loan

The loan is secured against the car, which is why you don't own it until you've made your last payment. It's important to make sure you understand the terms and conditions of your hire purchase agreement before signing the contract. HP is quick and easy to arrange, the deposit is usually small and the interest rates available tend to be quite competitive. The key complication is the fact that you don't own the car until the final payment, plus it can be more expensive for short term agreements. 

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