Credit check ahead so drive the 05-reg finance deal carefully

January is the month in which the car finance sector steps up several gears, as credit providers race to capitalise on drivers' desires to upgrade to a shiny new 05-plated set of wheels.

Buying a car on credit, however, is rife with opportunities for taking a wrong turn.

There are, broadly speaking, two types of car finance available: straightforward, unsecured motor loans from a bank or credit union, and the range of hire purchase, personal contract purchase and leasing finance plans sold by car dealers on behalf of finance companies such as Bank of Scotland, GE Capital Woodchester and Permanent TSB.

"Forecourt finance" is sold on commission by garage owners, with special low-interest offers frequently linked to a particular make and model of car.

But although drivers might get a good deal on the car itself, they often end up throwing away money on high interest rate charges and other fees listed in print so small a visit to the optician would be necessary to interpret it.

Forecourt finance can be a quick and easy way to pay for a new car but, under hire purchase deals, the low initial repayments typically give way to a massive balloon payment at the end of the repayment term.

Motorists can find that the amount they owe on the car exceeds its actual value.

According to the Irish Financial Services Regulatory Authority (IFSRA), consumers often don't realise that they do not actually own the car until they have paid the last instalment of the loan: until that time, they are simply hiring the car.

"If you fail to pay the full loan, the finance company has a right to repossess the car," IFSRA warns in its consumer guide to personal loans and credit. Once the consumer has made a third of the repayments, however, the lender must get a court order before they can repossess the car.

Other hidden charges on hire purchase deals include "documentation fees" of €50-€100, interest surcharges for missed repayments, penalty fees for missed or late payments, "rescheduling charges" of about €60 if consumers want to change the term of the deal and a "completion fee" for when ownership of the goods finally passes over to the driver.

This completion fee can be around €60, according to IFSRA. However, some finance companies charge the equivalent of one month's rental or higher. The finance companies do this by tacking a 61st month onto the end of a five-year deal, or a 37th month onto the end of a three-year term, in the hope that consumers won't notice.

Consumers are, however, entitled to a list of all additional fees and charges and IFSRA recommends that they ask the garage owner for this before they sign any agreement.

Motorists should also ensure that the car dealer is authorised as a credit intermediary by the Office of the Director of Consumer Affairs.

The authorisation, which must be renewed each year, should be on display in a prominent position in the public area of the showroom, according to the Director of Consumer Affairs, Ms Carmel Foley.

Consumers can also check if the dealer is authorised by phoning 1890 220 229 or by checking the register of credit intermediaries on www.odca.ie.

The forecourt may not be the ideal source of car finance, Ms Foley added.

"A personal loan from a bank, building society or credit union may be more competitive than the package on offer by the financial institution used by the dealer," she said.

"Before consumers commit themselves to any deal, they should first shop around to ensure that they get the best financial package," she added.

The table below shows the interest rate (APR) charged by some of the main providers of unsecured finance on a loan of €10,000. In some cases, the rates shown are general personal loan rates rather than motor loan rates.

It is worth noting that Bank of Ireland charges lower interest to people who arrange their loan online or using telephone banking (i.e. the rate on a €10,000 loan would be 8.4 per cent rather than 8.9 per cent). Ulster Bank also offers cheaper credit to online customers, waiving the hefty arrangement fee it normally charges.

The APR should represent the total cost of the credit, taking into account all set-up fees as well as the interest rate charged.

However, financial institutions sometimes use different formulas for calculating APRs, so consumers should compare and contrast the actual repayments they are offered, making sure to base comparisons on loans of the same term.

If consumers repay the €10,000 loan over three years, the monthly repayments will be €309-€316. Over five years, the repayments will be a more manageable €199-€205.

But opting for longer repayment terms can hurt motorists' pockets even more than if they make the mistake of choosing an expensive lender.

For example, at Ulster Bank, the total cost of credit on a €10,000 loan is €12,345 over five years, but just €11,412 over three years, meaning a customer who opts for a shorter term will save €933 in interest payments.