Key Post What is the best way to finance a new car, PCP, HP or term loan?

Leo

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This Key Post / thread aims to serve as a quick overview of the options available to finance a new car purchase, explaining some of the pros and cons of each approach. Obviously, funding a car purchase from savings is the preferred method should you have the available funds.

There are three common options available when financing a new car purchase:
1. Loan from bank or Credit Union
2. Hire Purchase
3. PCP (Personal Contract Plan)

Option 1: Regular Bank Loan
Taking a regular loan from your bank or Credit Union requires a little leg-work on your part, but these are usually the simplest agreements with the least amount of small print to understand. Some Credit Unions offer competitive rates, but you generally need to be a member with a savings history to obtain these.

Pros:
  • Typical motor loans are unsecured, so you own the car outright from day 1. Should you run into problems repaying the finance at some point in the future, you can sell the car to help.
  • Simple agreements, fixed repayments & term
  • Flexibility to finance as much or as little of the purchase price and use personal savings to cover the balance
  • You are free to negotiate as a cash buyer, without any restrictions such as being limited to the dealers offering more competitive financing deals.
  • Free to pay off the loan at any time without penalty

Cons:
  • High APRs means loans are expensive when compared to the alternatives

Option 2: Hire Purchase
With HP, the finance provider effectively buys the car and rents it back to you over an agreed period. A deposit of 10%+ is required. Consumer Help link.

Pros:
  • Lower interest rates
  • Flexibility to finance as much (up to 90%) or as little of the purchase price and use personal savings to cover the balance

Cons:

  • You do not own the car until such time as the finance is payed in full
  • Little flexibility in HP agreements
  • Possibility of balloon payment at the end
  • Missed payments can have serious implications up to repossession

Option 3: PCP

PCPs are relatively new option financed via dealers (first Irish reference I see dates from 2014). These are a slightly more complicated option where you pay a deposit 10-30%, agree a final value and finance the balance over an agreed term. At the end of the term, you have the choice of handing back the car and walking away with nothing (provided the car has been maintained to the agreed standards) or paying off the final value and keeping the car. This final payment can be financed via the dealer or other sources.
Consumer Help link.

Pros:

  • Lower APRs, down to 0%
  • Lower monthly payments - you're only financing the amount after deposit and final value
  • Improved flexibility over HP deals
  • Choice of options at end of finance period, might be particularly suitable for those who want to keep options open in terms of moving to a different model as family circumstances change, or expect a lump sum that will cover the final payment
  • Flexibility to switch to a new car before the agreed period ends

Cons:

  • You do not own the car until such time as the finance is payed in full
  • Large final payment of ~20-30% if you choose to keep the car
  • More onerous terms & conditions relating to maintenance, mileage and condition car
  • Limits imposed on max deposit generally ~30%
  • Lower monthly payments may encourage some to overstretch
Many of the cons associated with PCPs are there by design in order to make it as easy as possible to roll-over to a new car when the finance period ends. These deals have been designed to make new cars affordable to more people, encouraging them into a cycle of rolling-over to a new car every 2-3 years. From a dealer's point of view, this gives them repeat customers and a steady supply of second hand cars in good condition for the dealers. That said, the terms on offer from many dealers make these a compelling offer so long as you are prepared to maintain the car to the standards required.

Finance Example
For illustrative purposes, here's the breakdown of costs for a car valued at €25,195 broken down for cash, HP @ 11% over 5 years, and PCP deals at 0% and 4% APR for a 3 year term. These rates were chosen as they are typical of what's available in the current market, there are better and worse deals out there.

For the PCP & HP deals, I went with 10% deposit. For the PCP deals I've assumed low mileage which lowers the monthly payments, but increases the final value accordingly. Also, for the purposes of comparing total purchase cost, I have included the cost of financing the GMFV @11% over two years. This makes for a better comparison between PCP and HP deals as they're all costed over 5 years.

OptionCashPCP @ 0%APRPCP @ 4%APRHP @ 11%APR
TermN/A3 years3 years5 years
DepositN/A€2,520€2,520€2,520
GMFVN/A€9,579.43€9,579.43N/A
Monthly0€363.77€419.40€493.01
Cost of Credit00€2,002.82€6,905.60
--------------------------------
GMFV @11% APRN/A€444.17€444.17N/A
Cost of CreditN/A€1,080.75€1,080.75N/A
Total Cost€25,195€26,275.75€28,278.57€32,100.60

Content based on this post by Ceist Beag and the wider thread.
 
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Brendan Burgess

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Borrowing, even at 0%, to buy a new car which you cannot comfortably afford is a bad idea, whether you finance it via PCP, the credit union or HP.

PCP at 0% is a good way to finance a car in the following circumstances:

  • You are very well disciplined financially
  • At the end of the three years you will have the cash to pay the GMFV or you know that you will be able to borrow it cheaply.
But if you are very well disciplined financially, you will probably be happy with a two year old car.
PCP is a bad idea in the following circumstances:
  • You are using it to buy a car you cannot otherwise afford
  • You are using it to buy a much bigger car than you need
What is better than buying a new car with PCP?
  • Buy a two year old car until you can comfortably afford a new car
  • It is better to buy a used car you can afford at 9% APR, than to buy a new car you can't afford at 0% APR.
PCP is not very flexible and flexibility is very important in all financial products

  • You can’t pay it off early
  • You can’t sell the car if you need to emigrate or trade up or down
  • You must get it serviced by an authorised dealer
  • You have a mileage limit

 
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Brendan Burgess

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Just to explain how a 0% PCP Works

upload_2019-1-27_8-44-36.png

Effectively, you get three years free credit.

If the interest rate were 6%, you would be effectively taking out a loan of €12,500 for 3 years at 6%.

Brendan
 

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Gordon Gekko

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I agree with your analysis, Brendan. PCP is great for people who have money (or will definitely have money), but other than that it's a recipe for disaster in my view. It is Ireland in the run up to 2008 in microcosm where credit is recklessly lobbed at the masses.
 

cremeegg

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I am a bit concerned to see that the table in the opening post clearly shows PCP as the cheapest finance option.



PCP is a bad idea in the following circumstances:
  • You are using it to buy a car you cannot otherwise afford
This is the kernel for me.
 

Ceist Beag

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I am a bit concerned to see that the table in the opening post clearly shows PCP as the cheapest finance option.
That is because it is the cheapest cremeegg - the table is not skewing the figures in any way. As Brendan outlines, the numbers for PCP are good so long as you fall into category of being someone who is
  • very well disciplined financially
  • At the end of the three years you will have the cash to pay the GMFV or you know that you will be able to borrow it cheaply.
 

Leo

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That's the key issue; PCP is a ruse to get people who can't afford a new car to buy one.
So long as they can afford the monthly repayments from the outset, then they can afford one so long as their financial circumstances don't change for the worse. Whether buying a new car is a prudent decision or not is another matter.

I think the real win for the dealers is in generating a steady stream of repeat customers taking new cars along with a steady supply of 2/3 year old cars in good condition. Making is as easy as possible to roll people onto new PCP deals means these buyers don't shop around at the competition.
 

Gordon Gekko

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I had a pint with my brother last night; he's planning to buy a 181 using PCP, but it fits nicely with the exercise schedule for his share options. That's an example where PCP makes sense.

I did however suggest that he'd be better off buying a 2 or 3 year old car, but that's a separate discussion.
 

monagt

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That is because it is the cheapest cremeegg - the table is not skewing the figures in any way. As Brendan outlines, the numbers for PCP are good so long as you fall into category of being someone who is
  • very well disciplined financially
  • At the end of the three years you will have the cash to pay the GMFV or you know that you will be able to borrow it cheaply.
I think you need to add an element of risk and or luck into this.

If you get scratched on the paint work, a slight dent from a supermarket trolly or car door, a number scratched, seat marked or damaged slightly........... what do they charge you for?

A new wing, panel respray, replacement bumper, new seat covers..................... are you at their mercy for the added costs?
 

Gordon Gekko

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I don't think that it's a separate discussion at all.

It's one thing borrowing too much money to buy a house. It's quite another borrowing too much money to buy a depreciating asset.

Brendan
I think it's gas that people caution against borrowing to buy wealth generative assets like shares, whilst PCP is all the rage. Borrowing to buy an asset that will depreciate hugely is crazy. If you're Rockerfeller, by all means buy a 181 D, but otherwise I'm an advocate of heading out to Joe Duffy or similar and finding out what they've got that's nice and circa 3 years old (and under warranty).
 

Nordkapp

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Will those seeking CU loans now be caught in 2018 with the CU checking the CCR for details of other loans such as PCP?
I ask in the context of a PCP period ending for a friend of mine and they having to seek a CU loan to pay off the car and take it outright. I am trying to dissuade them from taking out a further PCP!
I also ask in the context of PCP, do the dealerships have to do a credit check with the CCR and what criteria would they use to turn you down for a PCP?
the VRT was enough to turn me off buying a new car, 2 to 4 yr old wasting chattel is next for me possibly from Brexit land.
 

Brendan Burgess

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I don't think a PCP is classified as credit? You don't own the car until you buy it at the end of the period. It is advertised as a way for people with bad credit histories to finance a car.

So I doubt if they are registered with the CCR.

Brendan
 
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