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Financing a vehicle purchase

Hidden Charges

 

Question:

How long should I take finance out for?

Answer:

The longer the period, the greater the total cost (except for 0% finance) However, opting for a four of five year deal may mean being able to buy a more expensive vehicle, simply because the monthly payments are more manageable.
Consider how much you can afford to pay each month and this will help you decide the term of the deal.

Question:

What other charges should I look out for?

Answer:

Ask about the following:

  • The size of any final payment
  • Are there any extra charges at the end of the agreement?
  • Early settlement charges
  • Added extras like Gap insurance or payment protection insurance
  • Remember to make sure the rate you're being quoted is the APR, not a flat rate

Question:

How do I get a competitive finance deal?

Answer:

Although most people only think of their bank or the dealer for finance, shopping around for a number of quotes for other finance providers can save you money. The AA recommends you compare three different options to secure a good deal in perhaps the same way you would for vehicle or home insurance.

Question:

What if I settle early?

Answer:

Three quarters of all loans are paid off early, but remember that you may be charged a penalty for early payment.

Information is supplied by the AA, http://www.theaa.com/

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Finance Options

We all know about purchasing vehicles with cash, a bank loan or on hire purchase, but did you that there are other paths to buying the vehicle of your dreams.

Personal Contract Purchase (PCP)

You be familiar with PCPs by various manufacturers' names, such as Ford Options, Nissan Preferences or BMW Select. They all work in the same way and are perfect if you plan to change vehicle regularly, or if you want cheap monthly payments.

A PCP involves the payment of a sizeable deposit and then a number of low monthly payments. At the end of the finance agreement, there are a number of options depending on whether the customer wants to carry on or end the agreement.

  • Pay a balloon payment and keep the vehicle
  • Hand the vehicle back and pay nothing
  • Put the vehicle down as the deposit on your next vehicle

The size of the balloon payment is determined at the outset of the agreement, and is taken into account when the original deposit and monthly payments are calculated.
The vehicle will have a guaranteed future value. This is the calculated value of the vehicle at the end of the agreement and it is taken into account when calculating monthly payments.

However, PCPs don't suit everyone's needs. The vehicle belongs to the finance company until the deal is completed and there are penalties for early settlement. The vehicle must be kept in good condition during the agreement - any damage or excess mileage will be taken from the final value of the vehicle.

 

Personal Contract Hire

Contract hire has always been popular with companies, but more and more private individuals are seeing the benefits of personal contract hire schemes.

Contract hire is very much like hiring a vehicle over a fixed term. You simply pay a fixed monthly amount over the period of the agreement. When the agreement has ended, you simply hand the vehicle back, leaving you open to start another contract or walk away.

The benefits of contract hire are that there is minimal initial outlay and a fixed monthly payment that is very easy to budget for (this is why contract hire is so popular with companies). There are also no depreciation or disposal issues to deal with, so the only additional costs are consumables such as fuel and insurance.

As with PCP schemes, there are penalty fees payable if the vehicle had covered more than the agreed mileage, or, if there is any damage to the vehicle. However, maintenance schemes can be built into the agreement, meaning that if there is a mechanical failure, the finance house will cover the bill.

Glossary

 

0% Finance

A finance agreement with no interest charges. If you take this finance option on a €10,000 vehicle, you pay back €10,000.

APR (Annual Percentage Rate)

The real cost of borrowing. The lower the APR, the cheaper the loan.

Balloon payment

The large payment at the end of a PCP contract.

Cost to change

The bottom line of what it will cost the buyer to change your vehicle. It is the difference between the trade-in value of your vehicle and the price of a replacement vehicle.

Depreciation

The value that your vehicle loses over a period of time.

Equity

The difference between the value of the vehicle and what you owe on it.

Flat rate

The amount of interest payable annually as a percentage of the total amount borrowed (this is always lower than APR as this does not include extra charges).

Gap insurance

If your vehicle is declared a write off by your vehicle insurer in the event of an accident or theft, there may be a shortfall between the insurers market value of the vehicle and the amount required to settle any lease or finance agreement. Gap insurance will bridge any shortfall. This shortfall may be quite significant depending on the cars depreciation and the outstanding period on the lease or finance agreement and you will be responsible for this shortfall by the finance or lease company. In the event of this occurring, a Gap Insurance policy would pay the finance or leasing company any shortfall.

Negative equity

When your vehicle is worth, less than your outstanding finance.

Residual value

The value of your used vehicle, taking into account depreciation, condition and mileage.

Trade value

What your vehicle is worth in ‘the trade’. This will be lower than the retail value of your vehicle as the trade has to allow for mark up on vehicles they sell.

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Finance FAQ's

We've teamed up with Money Expert to bring you the answers to the most commonly asked questions about vehicle finance - from conditions to credit scores.

Should I use a secured or unsecured loan to purchase a vehicle?

If you purchase the vehicle through a dealership, they will often offer you a monthly repayment plan, known as a Hire Purchase Agreement. You agree to pay in instalments, but you only own the vehicle once the final instalment has been paid. Until then the company you bought it off technically owns it.

You can of course take on the debt yourself with a secured or unsecured loan. If you are going to buy an expensive vehicle, in excess of €35,000 or so, a secured loan may be your only option as few lenders will take the risk of offering you an unsecured loan.

How much can I borrow?

Only borrow what you can afford. Consider whether your current income is sufficient to cover any debt you might take on - you have to ask yourself how the debt is going to affect your disposable income, and whether you will have enough cash to live on every month. Remember to take into account your current debts, and also any savings schemes you are currently paying into when making these decisions.

How long should I take a loan out for?

The answer to this is not immediately obvious; it’s a question of getting the best value for money. Shop around and think about the terms of the loan. If you take on the loan for a long period then in most cases your monthly repayments will be small but you will ultimately end up paying more as the debt won’t shrink rapidly. If you take on a short term loan then you’ll probably pay a high monthly rate of repayment but will clear the debt quickly. You need to find a happy medium for yourself.

What happens if I’m ill and can’t work or if I’m made redundant?

Payment Protection Insurance is a form of insurance which protects your commitments to debts should you have a sudden loss of income due to illness or disability. If you find yourself unable to work then the insurer will commit to pay your debts. Most policies differ so it is important to read the terms and conditions carefully. The terms of the policy will usually specify how long your insurer is willing to pay debts for, and if they will not commit to paying 100 per cent of the debt, then what percentage they will commit to paying.

What is credit scoring?

When you apply for a loan, the lender will look to build a credit score around your application to decide whether or not you are a reliable borrower. They will examine your current and past credit commitments and how well you have met them before deciding whether to give you the money.

What is a credit pass mark?

Before a lender gives you any money they will examine your credit score and from this score they will derive a number which represents an acceptable risk for them to take on. If your score meets or exceeds this number then you should get the money.

I’ve been turned down for a loan - what should I do?

If you have been turned down for a loan the most important thing to do is to resist the temptation to go out straight away and apply for half a dozen extra loans. This will show up on your credit report and it could make you look desperate to potential lenders. Instead, take time to find out why you’ve been rejected. It could be that your credit report contains errors which you are entitled to amend. Alternatively, wait until you are promoted or take a better job before re-applying.

How can I see my credit report?

In order to get hold of a copy of your credit report you need to contact one of the credit agencies who compile them. Agencies include the Irish Credit Bureau, Experian, and, Equilend. You can normally get one copy for free.

What can I do if the information on my credit report isn’t accurate?

Check that all the information is accurate and, if you spot mistakes, be sure to report them to the agency. Maintaining the accuracy of your report can be particularly important if you have had serious financial difficulties in the past, such as voluntary agreements or a bankruptcy. As soon as you meet the terms of these agreements, ensure that you send the documents to all the relevant people, including the credit agency.

Are there any charges not included in APR?

The APR is the average interest rate built up over the whole term of the loan, so borrowers can compare loans. It takes into account the interest, any insurance, and fees. You may be hit with a fee if you choose to repay your loan early. This won’t be included in the APR but you’ll be made aware of what this is (usually one month’s repayment) in the terms and conditions.

What are the loan conditions?

Loan terms and conditions will vary, so be sure to read them all carefully. The most important thing to check is the cost of the deal. If the interest rate is high you could consider alternative ways to finance the deal, so don’t jump in.
If you’ve signed up to a personal contract hire, you’ll agree a monthly rental cost with various terms and conditions, such as total miles travelled, vehicle maintenance and servicing. If you’ve sign up to a PCP, watch out for the Minimum Guaranteed Final Value - this is what your vehicle is worth when a PCP contract ends, as long you haven’t exceeded any set mileage limits. If all’s well, that’s how much you’ll pay to buy the vehicle at the end of the contract.

What should I check when signing a credit agreement?

See above

I’m having trouble keeping up with my repayment. What should I do?

You should take stock and try and work out why you can’t afford them. Are you spending extravagantly elsewhere? Could you budget better? If you’re really struggling the best thing to do is tell your creditors. Burying your head in the sand is likely to make matters worse. If you default on a payment you’ll have to pay a fee and things can easily spiral out of control. If you are still struggling, consult the Citizens Information Board.

Do I have to buy PPI?

The short answer is no! PPI can be expensive and there is some criticism of it. However the major criticism is the cost, not the concept. You don’t have to buy PPI through your loan provider, so if you shop around you could find a better value deal. If you’re keen to protect yourself, don’t be put off by the scaremongering – just be careful.

If my vehicle’s purchased by PCP, HP or PCH and the vehicle is faulty, what should I do? Report the fault to the dealer, and get them to rectify the fault. Meanwhile, keep paying the instalments, otherwise you’ll default on the credit agreement, and the vehicle may be repossessed.

How can I cancel a credit agreement?

Most credit agreements can be cancelled provided you act quickly. There will normally be a cooling off period of a couple of weeks, in which you will have the opportunity to think about the conditions of the loan. You lose this right if you sign the documents on the dealer’s premises, however. The agreement can be legally terminated at any time, if you are not the owner of the vehicle until the last payment is made (as is the case with Conditional Sale and Hire Purchase agreements). Provided you have paid half the credit price of the vehicle, you can simply hand it back. However, you will lose all the payments you have made to date, and will be liable for further charges if the condition of the vehicle is poor. If you haven't paid half of the credit price of the vehicle, you will lose the vehicle and still be liable for any outstanding payments. Generally, this is the worst case scenario of a credit agreement.

Is there a cooling off period with credit agreements?

There will normally be a cooling off period of a couple of weeks in which you will have the opportunity to think about the conditions of the loan. You lose this right if you sign the documents on the dealer’s premises however.

If I settle early will there be any consequences?

One of the most important hidden charges with any loan is the early redemption penalty. It sounds scary, but in plain English it means you’ll get hit with a fee if you decide to pay off a loan or mortgage early, or to move your borrowing to a different product or provider. If you can find a provider that won’t charge then great, but the majority will, so you’ll need to be flexible.

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Vehicle Loans A-Z

It's important to understand what the finance firms are talking about – so you can make the most of your money.

AER

Annual Equivalent Rate - the recommended way to compare savings products and current accounts. AER is how they calculate the interest paid to you. It shows how much interest you are earning on your cash if it was paid once a year and built up annually.

APR

Annual Percentage Rate - yearly rate of interest you pay on debt that often includes fees and costs. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average interest rate built up over the whole term of the loan, so borrowers can compare loans. For example, in mortgages, it is the interest rate of a mortgage when taking into account the interest, mortgage insurance, and certain closing costs including points paid at closing.

Authorised overdraft

This is the agreed limit to which a person can exceed the balance of their account.

Credit Borrowing money and promising

To return it at an unspecified later date, usually with some form of extra charge (interest) on top of the initial sum.

Creditor

The person or organisation you owe money to.

Credit cards

There are more credit cards in the Ireland than people, so you’ve probably got one! See credit. By paying for things by credit card, you are borrowing money and promising to pay it back, with interest. The sooner you repay it, the less interest you’ll incur. Credit cards come with a mandatory, interest-free period of around 50 days.

Credit sale agreement

This means you’ve bought goods by financing the deal with a loan, which is repayable over a fixed period of time. More often than not, it’s a form of in-store finance. Washing machines and TVs are often sold like this. The retailer will arrange the deal for you with a partner finance company. You own the goods straight away, meaning they can’t be taken away from you if you fall behind.

Credit scoring

The scoring system used by lenders to work out whether you represent a risk for them to lend you money. Usually your credit score will take into account whether you pay your bills on time, the number and type of accounts you have, county court judgments and any outstanding debt.

Conditional sale agreement

Another name for a Hire Purchase Agreement.

Debtor

You - if you’ve got a credit card, loan or mortgage. In short, it means you owe money to someone.

Default

If you ‘default’ on a loan or debt, you are unable to pay your debt repayments as agreed. This can often lead to cash penalties.

Depreciation

The dictionary will tell you it’s the decline in the value of a “capital asset”. In reality, it’s the cost of owning and using something, for example, a vehicle’s value will decrease the longer you own it and use it.

Direct debits

A regular payment (often a bill or membership fee) made from a bank or building society account to an organisation - but only with the agreement of the account holder.

Fixed interest rates

A deal, whereby you agree to pay an agreed rate of interest, for a limited period only. Most commonly used with mortgages, homeowners can get peace of mind knowing what their repayments will be. Bear in mind, when the deal expires, you’ll often default to a higher variable rate.

GFV

Guaranteed Final Value – also called "balloon payment". It’s the final lump sum you’ll pay for your vehicle based on its predicted depreciation if you’re buying through a PCP.

HP

Hire Purchase – another way to buy a vehicle; often used to buy white goods like fridges and freezers. You agree to pay in instalments, but you only own whatever you’re buying once the final instalment has been paid. Until then, technically, the company you bought it from owns it.

Hire agreement

A written record of hire terms. Under the Consumer Credit Act all regulated hire agreements must be in writing – and they must give specific information, in a specific way. Don’t settle for anything less than a formal hire agreement when you’re hiring a vehicle.

In-store finance

These deals can help you to pay for expensive purchases like furniture or large electrical goods over a set period of time. The store will often offer zero per cent interest for a fixed period and in some cases you can defer beginning to pay back the money for up to a year.

Interest

There are two broad meanings of ‘interest’ in finance:
1. A charge on the repayment of borrowed money (credit, a loan, etc.), often expressed as a percentage of the total amount you borrow.
2. A return on an investment, for example, banks pay you interest on your savings.

Loan

Borrowed money, normally with pre-arranged terms of repayment, for a limited time.

Loan Sharks

One to avoid! Loan sharks offer to lend you money at your door, but charge excessive rates of interest. They’re completely unregulated, and there's the potential for things to get nasty if you don’t pay your debt.

MGFV

Minimum Guaranteed Final Value – The MGFV is what your vehicle is worth when a PCP contract ends, as long you haven’t exceeded any set mileage limits. If all’s well, that’s how much you’ll pay to buy the vehicle at the end of the contract.

PCH

Personal Contract Hire – a way to hire a vehicle for a lengthy period of time at a fixed cost. The ‘personal’ bit just means private individuals can sign up, as well as companies. You agree a monthly rental cost, with various terms and conditions, such as total miles travelled, vehicle maintenance, and, servicing.

PCP

Personal Contract Purchase – the process where a vehicle is leased for a set period, at a fixed monthly cost. Then at the end of the contract, you have the option to buy it outright, or, return it with nothing further to pay.

PPI

Payment Protection Insurance – insurance that pays out if you can no longer make payments on loans, mortgages and credit cards because you cannot work, e.g. if you lose your job, through no fault of your own, or you fall ill. Can be expensive and there is some criticism of it.

Secured loan

Borrowing money and guaranteeing to repay it all with interest by offering an asset (usually your home) against the loan. If you don’t repay the money, you could have your home repossessed. You can normally borrow much more with a secured loan, than with an unsecured loan.

Standing order

Another way to meet regular payments. You arrange for your bank to send a fixed amount from your bank account to another bank account by electronic transfer. Commonly used for paying rent or repaying a loan.

Store cards

A type of credit card only usable in certain shops. They often come with a discount or incentive to shoppers to use them in-store. But beware - they often come with very high interest rates.

Sub-prime lending

People who don’t fall into normal categories for a lender to calculate the cost of a loan are often called 'sub prime'. You might be unemployed, self-employed or have a low credit rating, after having failed to pay bills, or, repay debt in the past.

Unauthorised overdraft

A negative balance, without the permission of your bank. If you exceed your balance by too much, you’ll be charged a fee.

Unsecured loan

Borrowing money - but without any form of guarantee against repaying it. Normally, the amount you can borrow is lower than with secured loans, as a result.


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