Its that time of the year, when you may be looking at different finance options for your new car. We are put together some information on hire purchase (HP) and personal contract plans (PCP) that you may heard about. We also compare both HP & PCP and a credit union loan.
Credit Union Loans & Personal Contract Plans (PCP)
You know the old saying; If it looks too good to be true…..
There’s a lot to be said for simplicity. For having a full understanding of the situation at hand. For not being confused or worrying about the small print or the hidden details.
Take buying a car. It used to be easy. You decide which car you want to buy, you find out the cost of buying it, perhaps the trade in value for your own car and then work out if or how much you need to borrow to pay for it. Simple.
For anyone who has tried to finance a car purchase in recent times, the process can be far removed from this. One emerging trend in car finance is the introduction of Personal Contract Plans (PCPs). Essentially a PCP is a lease scheme which makes financing a new car seem affordable for lots of us with low monthly repayments.
Here’s how it works:
Typically, a person will be offered a PCP package at the forecourt when buying a car.
The buyer will be asked to pay an initial deposit (usually between 10% and 30%) and then agree a monthly repayment – usually over the next three years. PCPs generally have low monthly repayments, which can make them seem more affordable when compared to other forms of finance.
The provider guarantees a minimum future value (MGFV) for the car taking into account depreciation and wear and tear. The MGFV is the amount you will have to pay to own the car at the end of the agreement. It is calculated by the finance company, based on its estimate of the future value of the car at the end of the agreement. It takes into account such things as, the car you are buying, length of agreement, the condition of the car at the end of the agreement and your annual mileage.
At the end of the term of the PCP, the buyer is left with 3 options....
• Pay a final payment (the minimum guaranteed future value or balloon payment) and keep the car.
• Hand the car back. Be aware that if you do opt to hand the car back, you don’t get anything from the car dealer for its value no matter how well you have kept it and maintained it and you might end up having to pay if you have not complied with all the terms and conditions.
• Put the car down as the deposit on another car and enter into a further PCP. It is important to be aware that the deposit you put down for the first car will not be available when you give the car back to use when taking out a new PCP. The equity you have built up in your monthly repayments and the difference of the MGFV is what you would have to put towards the new car. All you have to put towards the new deposit is whatever equity you built up from the first PCP. This equity may be less than the deposit required for rolling it over so you will need to top the deposit up each time.
With a PCP agreement, you don’t own the car, you are hiring it for a period of time, typically 3-5 years. You only own it when you make the final payment. This is important because if you were to run into financial difficulty during your PCP agreement, unlike a personal loan, you cannot sell the car to pay off your debt. These agreements are among the least flexible forms of finance. Because the payments are fixed for the term of the agreement, you cannot usually increase your repayments each month if you wish to do so. If you want to extend the term, you may be charged a rescheduling fee.
Before agreeing to a PCP make sure you always read the small print before you sign up. For instance, the cap on the number of miles/kilometres you are allowed to clock up over the period of the agreement. They may also request that you commit to certain car servicing requirements.
Always enquire about any additional fees and charges. You are entitled to a list of all additional charges and fees, so ask the garage for this before you sign up to any agreement. For instance, ask if there is any documentation fee for setting up the agreement, missed repayments fees or repossession charges.
Credit Union Car Loans
• Unlike a PCP you own the car from the outset
• You can sell the car on at any time
• You can borrow for the full amount
• There are no hidden fees, admin charges, transaction charges, set up costs or balloon payments
• The interest you pay on a credit union loan is the full cost of the loan so it is fully transparent
• Credit union interest rates are fair and reasonable and capped by law
• Repayments are calculated on your reducing balance, so you pay less interest with each repayment
• Your credit union loan is insured in the event of your death - subject to terms, conditions and eligibility criteria - at no direct cost to you.
• You can pay off your loan early, make additional lump sum repayments or increase your regular repayments, without a penalty. Other lenders may charge you extra for paying them back faster!
When comparing finance options, take the time to compare the total amount payable on a credit union car loan (cost of credit) with the PCP cost (the deposit, plus monthly repayments and final payment). Make sure you also compare the terms and conditions of each option.
An issue with a PCP is that it can restrict what you do with the car during the term. If you’ve taken out a credit union loan, then the car is yours to do with as you please. Drive as many miles as you please and crucially, sell it if you need to.
The way a PCP is structured can set up a situation where the easiest and simplest option is to roll over into a new car and a new plan. PCP\\\'s are, in effect, a way of trying to ensure that you will come back and buy another car from the same dealer or manufacturer. All well and good, but what if you don\\\'t like the brand of car or range they have to offer anymore? It does seem a little like saving money in the short term by spending more over a longer period. Our advise - read all the small print and be fully aware before you sign on the dotted line.
Credit Union Loan & Hire Purchase (HP)
Why is a credit union car loan better?
When it comes to financing the purchase of a car, many people simply look for the lowest rate on offer and believe it to be the best option. Headline rates may attract the most attention, but the devil is very much in the detail. Many ‘car finance loans’ offered by garages and some banks are actually hire purchase agreements.
The main difference between using a personal loan and a hire purchase agreement to buy a car is that with a personal loan you borrow money, pay for your car, and own it immediately. With a hire purchase agreement, you don’t own the car until you make the final repayment. This means you cannot sell the car if you run into problems making your repayments.
If the motor dealer is arranging the hire purchase agreement, the motor dealer acts as an agent for a finance company and earns commission to arrange the finance for you. In this case, the motor dealer is acting as a credit intermediary and must be authorised to act on behalf of the finance company.
When you use a hire purchase agreement to buy a car, the motor dealer sells the car to the finance company. The finance company then rents the car to you for an agreed period of time in return for a set monthly repayment over a number of years.
Watch out for the range of additional fees and charges which you may incur as part of a hire purchase agreement. This would include a documentation fee (for setting up the agreement) and completion fee (a fee charged to end the agreement and pass ownership to the car purchaser). If you run into difficulty in meeting the terms of the hire purchase agreement, you may be charged a penalty fee for missed repayments, a rescheduling fee (if you need to change the terms of the agreement) and a higher rate of interest may be charged on any repayments which you missed.
The conditions of some hire purchase agreements result in monthly payments not being evenly spread out and you may pay less in the earlier months of the agreement. This can make your monthly repayments appear more affordable. However, you may have to pay a large final payment (known as a balloon payment) at the end of the term, a payment you may not have budgeted to meet. It can be a real sting in the tail for some.
Thankfully, a car loan from your local credit union is much more straight forward. Helen Courtney Power, Business Development Manager, Killarney Credit Union said \\\"You borrow the money from us, pay for the car and you own the car immediately. You agree a repayment schedule with us. If you run into difficulty, you can talk to us to see if you can come to an agreement on the repayment terms. Should you be in the happy position of being able to repay the loan early, you may do so without any penalty charges.\\\"
Having arranged finance with your local credit union in advance of going shopping for a car also puts you in a stronger position. It helps to know exactly how much you have to spend and because you are not going cap-in-hand to the dealer, you are effectively a cash buyer and you may be able to negotiate a better deal.
So if you’re thinking about your options for financing a car purchase, look no further than Killarney Credit Union with branches at Beech Road, Park Road and Kenmare.