How to pay for your next purchase

THE Covid pandemic has created much uncertainty around purchases that have a significant impact on your finances, like car buying. If you are considering changing your car, you may be wondering whether or not now is the right time. To tempt you back into showrooms there are a host of post- Covid car deals and offers available at dealerships, so it is a good time to snap up a bargain.

However, you should carefully consider how you pay for your new purchase - this depends on your own financial situation and how much flexibility you are looking for, so you need to understand your options before taking the plunge.

Do you buy with cash or finance your car?

One of the main advantages of buying with cash is that you don’t pay any interest on the transaction. However, keep in mind that buying with cash may mean that you would be left with little or no savings to cover unforeseen expenses.

What are your financing options? Personal Loan

The simplest way you can finance a new car is by getting a personal loan from your bank or credit union. You can typically take out this type of loan with repayment terms ranging from three to five years and you can borrow the amount you want to pay for the car or make up any shortfall with savings or your current car’s trade-in value.

The main advantage of a bank loan is that you own the car from the outset so you can, if necessary, sell it to repay the loan should you fall behind on your repayments. A credit union loan affords further flexibility as there are no hidden fees, admin charges, transaction charges, set-up costs or balloon payments, plus you can pay off your loan early, make additional lump-sum repayments or increase your regular repayments without a penalty.

Some lenders may charge extra for paying back faster. Another advantage is that you essentially are a cash buyer, so this should give you some scope to negotiate a higher discount. The average loan interest rate from the Credit union is 8.6pc APR (annual percentage rate), whereas banks such as Bank of Ireland are offering 6.80pc while AIB offer a rate of 8.95pc APR.

The best way to compare loans is on APR, as essentially this is the real cost of borrowing money because it includes interest and charges. The lower the APR, the better the finance deal. As with all financial agreements, you need to ensure that you only borrow as much as you can afford to repay.

Personal Contract Purchase (PCP)

PCPs are a form of car finance based on a hire purchase (HP) agreement. However, unlike traditional HP or a bank loan, the repayments are typically lower, as you are paying off the depreciation of the car and not its entire value. At the end of the agreement you have the choice of whether to make that final payment to own the car or not.

The non-refundable deposit is typically between 10pc and 30pc of the value of the car and can be paid in cash or, if you already own a car, you can trade this in for part or all of the deposit. PCP agreements are usually made for terms between three and five years.

A guaranteed minimum future value (GMFV) represents what the car will be worth at the end of the contract and this, plus the deposit you choose to put down, is taken away from the total cost of the car, and you pay monthly payments (plus interest) on the remaining balance.

PCPs are a very popular option with Irish buyers, but it is important to ensure you fully understand any mileage limitation or terms and conditions. If you do not keep up the payments the bank will repossess the car.

The car must also be returned in good condition, so you may be charged for any scratches or any damage. Or if you have a crash and the cost of the repairs is greater than 66pc of the original list price, then you may also not get the minimum value you were hoping for.

Other things to look out for are: high mileage could mean a lower minimum guaranteed value; you may be charged ‘arrangement fees’, typically €50-€150; it is your responsibility to ensure that the car is regularly serviced; and you risk a penalty if you exceed the mileage condition of the contract, usually around 15,000-20,000km.

Personal Contract Hire (PCH)

A PCH is a similar arrangement to PCP and is a type of long-term lease; you have the use of a car for an agreed period of time with fixed monthly payments. However, unlike PCPs, there is no deposit required and no option to buy the car outright at the end.

Leasing

When leasing a car you pay a deposit and a fixed monthly payment that may include all service and maintenance charges. However, leasing doesn’t allow you to own the car at the end of the term.