How to choose the best car finance

If it’s time to get a new car and you’re short on funds, car finance could be the answer. Here’s three ways to finance your car purchase in Ireland and how to choose the best option.

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.

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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.

  1. Personal contract plans (PCP)
  2. Hire purchase (HP)
  3. Car loans

Personal contract plan (PCP)

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:

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:

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:

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:

  • Repayments are lower
  • Only borrow part of the purchase price
  • You can swap your car often
  • Save up while you hire the car
  • Minimum deposit is required
  • Mileage restrictions apply
  • Large lump sum to own the car
  • You could go into negative equity*

*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.

Hire purchase (HP)

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:

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:

  • No lump sum payment to own the car
  • Option to pay 50% and return the car
  • Monthly repayments are higher
  • Minimum deposit required
  • The car isn’t yours until the term ends

Car loan

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.

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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:

  • No deposit needed
  • Own the car from day one
  • No mileage restrictions
  • You can sell the car
  • Age restrictions may apply to the car
  • Higher interest rates on older cars

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.

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It only takes a few minutes to find the best loan for your borrowing needs.

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:

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:

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Car finance FAQs

How do I apply for car finance?

You can usually apply online, or if it’s through a dealership, the salesperson will complete the application for you at the showroom, and you’ll need to sign to agree to the terms and conditions.

You’ll need to provide information about:

  • The vehicle
  • The finance and loan term
  • Your identity
  • Your bank details
  • Your employment
  • Your income and outgoings
  • Your credit history

The information you give, alongside a credit check, will be used to decide whether to approve you and what interest rate you’re offered.

Can I buy a used car on car finance?

Yes, you can, but you’ll need to check it doesn’t exceed the maximum age allowed by the finance provider when you take out the finance.

How quickly will I be approved for car finance?

It usually takes between 15 minutes and 3 hours to find out if you’ve been approved, depending on the dealership, finance company or bank, and how you apply.

This makes it possible to take the car home on the same day in some circumstances.

Will a credit check be carried out?

Yes. You should limit the number of applications you make for car finance, or it could harm your credit score.

If you’re worried about your credit history, you can check your credit record for free.

Can I switch dealers with PCP?

Yes. You’re free to go to a different dealership if you want to switch to a new make of car. They’ll call the finance company to find out what’s owed on the car and then value the car for you.

If it’s worth more than the guaranteed minimum future value, you can roll this credit into your next PCP, but if it’s worth less, you’ll have to decide whether to:

  • Pay off the debt and start a fresh PCP
  • Return the car and pay what’s owed
  • Carry the debt forward into a new PCP

Carrying the debt forward could lead to a bigger debt further down the line that may be unmanageable.

Can I pay my car finance off early?

Yes. This is usually an option and can be a good way of saving on interest, but always check if there are any early repayment charges.

What will my monthly repayments be?

It depends on several factors, for example:

  • How much you borrow
  • The interest rate
  • The loan term
  • The type of finance, e.g. HP, PCP, car loan
  • Your credit history

Lots of car finance companies have calculators that can help to give you an idea of what your repayments will cost. You can play around with the term to reduce or increase your payments to fit your budget.

Make sure you can comfortably afford the repayments for the full term to avoid getting into arrears and shop around for the best rate.

Is insurance cheaper if you finance your car?

No, the price of your car insurance is not affected by the way you finance your car. However, some car finance companies may require you to take fully comprehensive insurance, which is the most expensive cover.

Warning: The cost of your monthly repayments may increase. Warning: you may have to pay charges if you pay off a fixed rate loan early. Warning: If you do not meet the repayments on your loan, your account will go into arrears. This may affect your credit rating, which may limit your ability to access credit in the future. Warning: If you do not meet the repayments on your credit agreement, your account will go into arrears. This may affect your credit rating, which may limit your ability to access credit in the future. Warning: You will not own these goods until the final payment is made. Information provided and Interest rates quoted valid at 21/09/2022