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'Don't be tempted by low monthly repayments’: An expert helps one reader decide on car finance

It’s important to understand the full cost of a PCP, consumer expert Áine Carroll advises.

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FINDING THE RIGHT option to pay for a new car can be a seriously tricky process, and before you sign your name on anything, it’s important to know exactly what you’re signing up for. 

Simon Roche is a reader of TheJournal.ie who is currently wondering how to pay for a new car. We asked Áine Carroll, the Director of Communications and Policy at the Competition and Consumer Protection Commission (CCPC), to offer some advice.

First up: Here’s what Simon had to say.

So, what’s your situation?

I have a set budget. Initially I thought that the car I wanted would meet the budget. But then I started thinking about buying a new car. I was expecting money to come in to pay for it and in the meantime, I convinced myself I needed a new car.

My concerns are ‘If I get it now, how do I pay the deposit and then make it a part of my normal monthly payment?’ and ‘What happens if I lose my job or have to take a wage cut, would I be able to manage?’ I’m also thinking, ‘As I pay it back, what would interest be?’ The whole process has taken about six to nine months.

What are you leaning towards?

The very first thing I was offered was PCP by a garage. It was explained to me and the numbers looked too good to be true. At the very start, I wasn’t sure about it.
Then I talked to dealers, they explained other options and one of them explained it very well, in a non-condescending way and I found it very helpful.

When it came to the interest, the PCP they are offering is really low – an interest of 2% or less. I was out for dinner with friends and a friend of mine who works high up in finance said PCP is fantastic. He said the mileage only matters if you’re handing the car back and walking away. With his advice I feel like I’m on the right track.

You’ve the option to walk away which kind of appealed to me. I don’t want to be stuck in a financial situation that I can’t get out of. I thought, worst case scenario – I can walk away, or I can sell the car myself and make back a bit of money.

Why PCP over other options?

It’s a lot more money to go for other options. With the interest I couldn’t afford a regular loan and I wouldn’t want one. A PCP through a garage seems like a safety net to me. Obviously, you pay more money for a new car – otherwise I’d be looking at an older car.

Interest rate is a huge thing for other options. At this stage I am convinced that PCP protects me more if I had to walk away with a certain amount of cost. With a normal loan, the bank owns the car. There’s the potential you might not be able to pay it off. With PCP, the dealership owns the car so you don’t worry – it’s more comfortable.

I’m hoping to save towards the final payment and have it in the next three years in an account ready to go. PCP also lets me adjust what will be my monthly payment which really affects my decision. If I do lose the job that’s where I’ll get hit. I can bring the monthly from €400 to €250. You can only do two or three years with PCP, it was nice to know I could bring it down to reduce it down and pay that off if I was stuck.

So, what advice does expert Áine Carroll of CCPC have to offer?

Here’s what she told us:

1. Don’t be tempted to spend more because of low monthly repayments

Buying a car is exciting. It’s easy to focus on the car rather than how to pay for it. Simon has obviously put a lot of thought into the decision – but it seems he’s been tempted into buying a more expensive car than he planned because of the lower monthly repayments. Work out how much you are going to pay over the entire agreement – not just monthly.

2. Make sure you completely understand what happens at the end of a PCP

I can see a little confusion about how a PCP works. He makes a few statements which may not be accurate. He is correct that mileage is a factor if you want to hand back the car at the end of the PCP. However, it may also be a factor if you want to roll over to a new PCP. It is only if you keep the car, ie pay the large final payment known as the Guaranteed Minimum Future Value (GMFV) and own it, that mileage doesn’t matter.

If you walk away at the end of the PCP you’ll still be liable for any repayments you missed. There may also be penalties for excess mileage and wear and tear. And you can’t just walk away at any stage. Typically during a PCP, you make the same fixed monthly repayment. Any changes would need to be negotiated with the finance company.

With a PCP, the finance company or bank legally owns the car – not the dealership. This means you have a lot of responsibility to look after the car, without the advantage of owning it. If you run into problems during the agreement, you need the finance company’s permission to sell it. With a personal loan, you own the car from the outset, so selling the car is more straightforward if you need to in order to repay the loan.

3. It’s correct to plan for the final payment (GMFV) with a PCP

The reader is thinking about his options at the end of his PCP agreement and has said he hopes to save up the final payment. He has clearly done a lot of research and looked at the costs of personal loans.

4. Don’t forget to fully research all your options

Look at all your options, including a personal loan, hire purchase or a PCP and compare the total cost of each. You can compare interest rates on loans using CCPC’s personal loan comparison. Don’t just focus on the monthly repayments – look at all the costs and the terms and conditions.

5. Remember that PCP isn’t as flexible as you might think

As he intends to buy the car outright at the end, mileage restrictions and wear and tear are less important for him. However, he may be required to have the car serviced at the dealer. PCP is not as flexible as he may think and if he wanted to reduce his repayments, that would extend the term and he would usually be charged a rescheduling fee to do so.

Think you know enough  when it comes to car finance? If you think it’s a tricky business, you’re not alone. Make sure you’re fully up to speed on the different ways to pay for your car by visiting the Competition and Consumer Protection Commission’s car finance section before the next time you buy a new car.

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