Car Finance

If you are considering buying a new car, the chances you will have to take out a loan of some kind to help pay for it.

Normally, you will have two choices: a personal loan from a bank, building society or credit union, or car finance arranged through the dealer from which you are buying the car.

Many personal finance experts will recommend that you take out a personal loan rather than car finance for a variety of reasons.

Car dealers are only too happy to offer car finance, and it can certainly be handy to get the car and finance from the same place, but you don't have the opportunity to shop around and get the best deal you can. 

In addition, most car finance packages offered by motor dealers are hire purchase agreements rather than loans.

Hire purchase agreements are very different from personal loans. There are important differences in flexibility, but also the terms and conditions regarding the ownership of the car during the repayment period are different too.

With a personal loan you borrow an amount of money for a set period of time and make regular repayments on which you are charged either a variable or a fixed rate of interest. You can use this money to buy the car, which you own straight away.

Hire purchase agreements are similar to fixed-rate personal loans - you pay back a set amount at a fixed rate of interest each month.  However, with these agreements the lender owns the car and can take it back if you fail to pay. The car doesn’t become yours until you make the final repayment. 

The others things to consider with some hire purchase agreements is that while the monthly repayments seem low, the final repayment is much higher and is often described as a ‘balloon payment’.

A typical ‘0% finance’ offer in theory means you pay no interest, but this usually means repaying the loan over one year, or paying a 50% deposit up front and repaying the rest within one or two years.
But if you decide to end an agreement early, it is more complicated than repaying a personal loan and, depending on how many repayments you have made, it can be expensive.
For these reasons, a low-rate personal loan could be a better option because they are more flexible than hire purchase agreements.

For those who would prefer to take out a loan rather than a hire purchase agreement, check out the Financial Regulator’s cost comparisons on its personal finance website, www.itsyourmoney.ie for the cheapest personal loans.

So if you need car finance, whether it’s a hire purchase agreement or a bank loan, there are various advantages and disadvantages to each type of product. But given the current recession, opting for the lower flexibility of a hire purchase agreement may represent a greater financial risk than a bank loan.

Payment protection insurance, or PPI, is one way to mitigate the risk involved, but it’s an expensive extra and many personal finance experts regard it as poor value, even now.
It is also recommended that you opt for the shortest possible repayment period, no matter what type of finance you do choose. Borrowing over a longer term means you will have lower monthly repayments, but you will be paying more in interest.
But if you are finding it difficult to get a car loan, now might not be the best time to buy, consider saving a little each month towards the cost of the car or look into buying a cheaper car.

You can request a report of your credit history by contacting the Irish Credit Bureau (ICB) or by visiting www.icb.ie.