Car finance and car loans are interchangeably used but should not be. The latter is part of the former. Car finance is a general term used when you borrow money to purchase your car. Whether you are looking to buy a new car or an old car, you can either use a car loan available from a direct lender or a car finance deal available from car dealers. There are two types of car finance deals widely popular among borrowers – hire purchase and personal contract purchase, followed by car loans. The approval criteria for all types of financing including auto loans from direct lenders are not the same.
Regardless of the finance option you consider to buy your car, upfront payment is mandatory. On no account does a lender fund the 100% sticker price of the car. You must have deposited at least 10% of the value of the car as a down payment. However, keep in mind that the amount doubles when your credit score is not up to snuff. The eligibility criteria vary by lender and car dealer, so make sure you have researched beforehand.
Hire purchase
Hire purchase deals are available only from car dealers. You cannot become the owner of the car unless the agreement term comes to an end. In addition to a 10% down payment, you are required to pay a fixed amortised monthly instalment. Not to mention, you will have to purchase fees and documentation fees as well.
Depending on the borrowed sum, the repayment length could be up to five years. By paying down each instalment, the principal amount will drop and become nil by the end of the contract. This is when the title of the car is transferred to you.
If you decide to return the car, you are completely free to do so. However, you are supposed to pay half of the value even if you are terminating the contract before halfway. If you have already discharged half of the debt, your dealer would not ask to make further payments. There might be some other charges such closing fees or exit fees.
Bear in mind that your car must be undamaged, otherwise you will be held responsible to pay necessary repair charges.
Here are the advantages and drawbacks of hire purchase
- No balloon payment is made at the end of the contract to own the car.
- You have an option to return the car provided you pay half of the debt.
- Monthly instalments will be higher in relation to personal contract purchases.
- A minimum deposit is a must, which is not less than 10%. In case of a bad credit score, it will be at least 20%. To get a loan in Ireland, you must have a good credit rating.
Personal contract purchase
Personal contract purchase differs from hire purchase. You are allowed to use a car for a period of time in exchange for some money, and by the end of the contract, you have the option to either return the car or buy it. The minimum deposit size could be 15% in personal contract purchases; however, some car dealers do not fight shy of accepting a 10% deposit. But in some cases, the deposit could go up to 30% depending on the car’s value.
In addition to a deposit, you will be required to pay a monthly instalment that covers only a portion of the car’s value. If you want to own the car, you will be required to pay the balloon payment at the end of the contract. If not, you can simply give it back to them.
Personal contract purchase come with some strings attached. Technically, you are paying to the depreciation of the car. Therefore, car dealers will set a mileage limit. Crossing the recommended limit will impose additional charges. The car must be n good condition at the time of returning it. Any wear and tear or damage will cost you extra charges.
Personal contract purchase deals are considered much more affordable than hire purchases because you pay interest only on the part of the value. However, you will most likely be able to qualify for the most affordable deal when you buy a second-hand car. The down payment will reduce the loan-to-value, so you do not have to pay too much money on interest.
Be careful while choosing the repayment term. A longer repayment term whittles down the monthly instalment but increases the total interest payment.
You have three options to choose between at the end of the contract
At the end of the contract, you have three options to consider:
- You can buy the car by making the balloon payment.
- You can return the car and you do not have to pay anything as long as you have strictly met the agreement’s conditions related to mileage, for example.
- You can return the car and renew the agreement on a new car.
Here are the upsides and drawbacks of personal contract purchase
- Monthly instalments are very low. You can easily manage payments. It is considered cheaper than a hire purchase.
- You have the right to swap your car for a new one or you can simply return it and move on.
- There is a possibility of saving money with personal contract purchases.
- Mileage restrictions are applied.
- Most of the payment is towards the car you have already paid during the term. The balloon payment should be considered an additional payment above the car’s value, which makes it the most expensive.
Car loans
Car loans are similar to personal loans available from direct lenders. To get the best car loan rates in Ireland, you must have a good credit rating. You are free to use your car, but your lender will have the upper hand until the debt is settled.
- There are no conditions related to mileage although you do not have the right to sell your car until the debt settlement.
- You can sell the car at any time, but you will have to discharge the debt.
- Interest rates will be higher.
The final word
Car finance deals include personal contract purchase, hire purchase and car loans. Make sure you are well aware of how each finance deal works before applying for a loan.
