Car Finance: While new car sales will not reach the record highs of the past few years, business is still brisk and trade is being fuelled at least in part by the ready availability of finance, writes Barry McCall
For many people the days are long gone when the first car was a cheap "banger" which had seen more owners than oil changes.
The choice now is between a fairly good quality second-hand car and a new car in the smaller more affordable range for first-time buyers, with seemingly everyone else opting for new cars. Buyers can opt for one of many specifically tailored car finance packages or they can go down the traditional routes - save and pay cash, take out a loan from bank, building society or credit union.
Paying cash is quite an attractive option for people on relatively high incomes who already own a car outright. If they trade in every two or three years and save in the interim, the system works very well. Instead of making payments to a bank or finance house, they make regular savings and the person drives a brand new car every two or three years. The advantages are no interest on repayments, and the leverage on the forecourt of being a cash buyer.
Not everyone has the discipline to keep to such a regime, however. For those of us with slightly less than iron financial discipline, about 65 per cent of us if the statistics are to be believed, borrowing is the only solution. One option worth considering for many people is their local or workplace credit union.
Credit unions, like banks, lend to members according to their means and what they can afford to repay. Interest rates are capped at a maximum of 1 per cent per month on a diminishing balance. This technically works out at an Annual Percentage Rate (APR) of 12.6 per cent, but it can actually be a lot lower for a number of reasons. Many credit unions have reduced rates to about 0.89 per cent per month, or 10.66 per cent APR. In addition, some credit unions give interest rebates at the end of the year.
A CAR loan from a bank or building society costs just under 10 per cent at present for amounts of between €6,000 and €12,000 with some institutions such as Premier Finance offering lower rates for loans in excess of this. The average motor loan in Ireland is between €10,000 and €11,000, and a €10,000 loan will cost about €320 per month over three years at these rates. Again, the person owns the car from the start and can avail of whatever forecourt discounts they can get for being a cash buyer.
An option of self-employed people is leasing. The advantage here is that the leasing payments are fully tax-deductible. This can be far more efficient than owning a car because the value of a car can only be written off at 20 per cent per year. Leasing costs are usually about the same as personal loan costs.
Of course, there are disadvantages - not least the fact that a driver never actually owns the car and the leasing company can repossess it at any time should the borrower default on payments.
Another option is known as personal contract purchase: a person puts down a deposit on a car, and agrees to make payments for a period of a number of years - two or three perhaps, and to make a final, large payment at the end. If a person stays within the terms of the deal, restricted mileage and strict servicing guidelines, they can simply hand back the car at the end of the deal without having to pay the large final payment - or they can trade it in against a new model without paying a final payment and start the process all over again.
Finally, various packages are available through the car companies. Fiat and GM have been innovators in this area for many years. These tend to be variants of hire purchase and personal contract purchase deals, and many of them involve large final - or balloon - payments. For many people the balloon payment is irrelevant as they intend to trade in the car at that point and the cost of the balloon payment is usually calculated to be below the market value of the car at that point - if it's been looked after properly of course.