How to choose the best car finance

Why use car finance?

Buying a new car costs thousands of euro, and if you don’t own your home, it’s likely your biggest asset.

Car finance offers a way to buy or hire a car by paying back what you borrow with interest over an agreed term. It allows you to spread the cost of the vehicle and plan your repayments.

Saving up the amount needed to buy a vehicle isn’t possible for most, which is why car finance is so popular.

Types of car finance

Whether you choose a new or used car, there’s a choice of ways you can pay for your vehicle if you’re unable to pay for your car upfront. Although there are differences between them, most finance options will need an initial deposit; then you’ll make monthly payments over an agreed time period.

Here are three different ways you can spread the cost of your car purchase with the pros and cons of each.

A personal contract plan or personal contract purchase offers a way to hire a vehicle for a period of time and then decide whether to buy it or give it back.

A PCP is made up of:

• A deposit, usually between 10% and 35%
• Monthly payments over a set term to cover a portion of the car’s value
• The final lump sum which is agreed upon upfront. This is the amount you’d have to pay to own the car, but you may choose another option.

The deposit

Depending on the car’s value, raising even a minimum cash deposit (typically 10%) can be difficult.

Many people trade in their old vehicle for the deposit, which can be topped up as required.

The bigger your deposit, the less credit you’ll need and the lower your repayments will be. However, if the interest rate on your savings is higher than the finance rate, you’ll lose money in interest.

The finance agreement

You pick a term, usually between one and four years, to pay off part of the purchase price at an agreed interest rate.

Also agreed upfront is the car’s guaranteed minimum future value (GMFV), which must be paid at the end of the term if you want to keep the vehicle.

This is a large lump sum, often referred to as a balloon payment. There are terms attached to the GMFV, for example:

• The car’s condition: If it’s not kept in good condition, you may be charged for the reduction in value or for repairs.
• Its mileage: You have to estimate your annual mileage when you take out a PCP and pay for any extra miles you do over the agreed limit at the end. The amount per mile is set out in the agreement.

You may also have to get your car serviced regularly with an approved dealer.

PCP repayments are lower than other types of finance because you’re not borrowing the car’s full value. Different ways to reduce your repayments include:

• Picking a cheaper car: If the purchase price is lower, you won’t need to borrow as much.
• Paying a bigger deposit: The higher the deposit, the less finance you’ll need.
• Increasing the term: The longer the term, the lower your repayments will be, but you’ll pay more interest overall. A term of more than 48 months is unusual.
• Finding a low interest rate: This will help to keep the overall cost of the credit down.

Although you’re only repaying a portion of the purchase price, you also pay interest on the GMFV.

When the finance agreement ends

Once you’ve paid off the finance, you can choose to:

1. Buy the car: Pay the final GMFV payment, and the car is yours.
2. Return the car: If it’s in good condition and within the mileage limits, there should be nothing to pay, but your dealer will check this.
3. Start a PCP on a new car: Return the old car and pick a new one. If the old car is worth more than the GMFV, you can use the difference towards your deposit.

PCP pros and cons

To help you decide if PCP is right for you, here’s a quick summary of the pros and cons:

*Your car may be worth less than the final balloon payment, for example, due to damage or excess mileage. Some dealers offer a deposit contribution against your next vehicle on PCP to offset the difference in value.

With an HP agreement, you hire the vehicle from the finance company during the term and only become the owner when the term ends.

You usually pay:

• a 10% deposit
• the finance amount plus interest
• a small documentation fee and purchase fee

You make regular repayments over a term of up to six years to cover the purchase price (minus your deposit) plus interest, and when the term ends, the car is yours.

Can you end the agreement early?

Yes. If you decide you don’t want to keep the car, you can give the vehicle back at any time. However, you’ll need to pay off 50% of its value (if you haven’t already), even if you return the car before the halfway point.

The car must also be in good condition, or you’ll be charged for any necessary repairs. Here’s more about ending your HP agreement early on the CCPC.i.e. website.

Hire purchase pros and cons

Here are the main pros and cons of HP:

One of the simplest ways to finance your car is to use a personal loan to buy your vehicle. You can apply online or through your bank, building society or credit union.

It’s easier to shop around for the best rate because you’re not tied to a dealership. You use the loan as cash to buy the car.

Compare personal loans

The most significant difference with a car loan is that you own the car straight away rather than initially hiring it. This gives you the freedom to sell the vehicle and pay off the loan early if you wish.

There’s no deposit to pay, and you can borrow the total amount and pay it back over a term of one to seven years with interest.

Car loan pros and cons

Here are the main pros and cons:

Electric car loan

Thinking of going electric? Electric and hybrid cars are generally cheaper to tax, run and maintain with grants available for certain makes and models.

An Post Money and the Credit Union both offer green car loans specifically for the purchase of grant eligible electric cars.

Where to get a car finance agreement

It’s common to take out finance through the dealer you buy the car from (if they offer it) or via the finance company they’re associated with, but that’s not your only option.

There are also some online car sales and finance companies that offer a one-stop-shop. Here’s how it might work:

1. Pick a car from their network of dealers
2. Apply for credit with them
3. Once approved, they’ll tell the dealer you have the funds ready to buy the car

If you source a car from elsewhere, you can go direct to a car finance company with the details of the car you want to buy and apply for credit through them.

Some car dealerships offer finance options through multiple financial institutions, which could help you get a better deal.

Details of who is providing the finance are shown in the agreement you sign, and any queries should be directed to them.

Can you get car finance with bad credit?

Yes, you can do things to increase your chances and options available if you have a poor credit history. Here are some of them:

• Get a free credit report to check everything is accurate. Here’s how to check your credit record, improve your credit score and deal with any mistakes.
• Take steps to improve your credit score, e.g. clear any arrears and make future payments on time.
• Use a specialist car finance broker who can match you to a lender with more relaxed lending criteria and may approve a poor credit history.
• Time your application well. Improve your chances of being approved by showing lenders an extended period with no arrears or missed payments.

Avoid applying for too many car finance agreements as a credit check will be carried out each time. Too many credit checks can damage your credit record further and limit your ability to access credit in the future

How to find the right car finance agreement

There are lots of things to consider before choosing how to finance your car, here are a few of them:

• Shop around for the best car deal: The lower the purchase price, the more you’ll save.
• Pick the right type of finance: Think about whether you want to own the car at the end or just hire it for a term.
• Know your budget and stick to it: Pay a deposit you’re comfortable with and keep the monthly payments at an affordable level for the entire term.
• Don’t just settle for the dealership’s finance: Make sure you’re getting a good deal by comparing the interest rate and terms with other car finance companies.
• Pay as much deposit as you can afford: This will reduce the overall cost of credit.
• Use a car finance broker to find the best deal: They can search multiple lenders, including those that could help if you have bad credit.
• Consider a personal/car loan: This may work out cheaper if you want to own the car. You won’t need to pay a deposit, and you can usually pay the loan off early without penalty.

Compare personal loans

Car finance FAQs