Loans

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.

What is car finance?

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.

Personal contract plans (PCP)

How do personal contract plans work?

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.

What to consider

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

Pros
  • Repayments are lower
  • Only borrow part of the purchase price
  • You can swap your car often
  • Save up while you hire the car
Cons
  • Minimum deposit is required
  • Mileage restrictions apply
  • Large lump sum to own the car
  • Your car could be worth less than final payment

Hire purchase (HP)

How does Hire Purchase work?

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.

What to consider

Here’s some advantages and disadvantages to weigh up when considering a hire purchase to finance your car.

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

Car loans

How do car loans work?

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.

The most significant difference with a car loan is that you own the car straight away rather than initially hiring it. This allows you 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.

What to consider

Here’s the main advantages and disadvantages of choosing a personal loan to finance your car:

Pros

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

Can you get loans for electric cars?

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.

How do you 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 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.

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Car finance FAQs

Can you 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 24/01/2023