The financial ups and downs of buying a car

The huge increase in the cost of gasoline and diesel as a result of the Ukraine war has hit the car-buying public the hardest. Electric cars have become hugely popular, especially where you can find an accessible and free ESB ev charging point!

Also for business owners, if you choose to opt for a company car, the first €50,000 was tax-free from Benefit In Kind, but from 2023 this changes and your complications will be for another article.

Meanwhile, John Lowe of MoneyDoctors.ie asks: do you know the difference when buying a car, whether it’s a diesel or electric car, between a personal loan, a hire purchase and a personal contract plan (PCP)?

Confusing to say the least. With a personal loan, you own the car from day one, but you have an unsecured loan with a lender who has risked getting your money back. For this risk, they charge a hefty rate of interest.

Installment purchase contracts
If you have an installment purchase agreement, you only own the car when the last “bullet” payment on the loan is made. If you want to end the lease before that end date and keep the car, you generally must pay the full rental-purchase price (the cost of the car plus interest and any other costs).

You may get some discount on the amount of interest you must pay if you end the contract early. However, this does not necessarily relate to personal loans.

With a PCP, there is the normal deposit and the usual 36-month loan. However, the fun begins after the age of three, as you have several options:

  1. Keep the car and pay the final payment or finance the payment for a couple more years, either way the car becomes yours to keep when the final payment is made. You can do whatever you want with the car now.
  2. Return the car and make no more payments. This will be subject to the condition of the car and the maintenance history, if you have taken care of it there should be no problem. If all is well with the car, you can return the keys and drive away owing nothing more, but remember you won’t have a car either, as that goes back to the dealer. Your credit rating will not be affected as long as you have made all your normal payments.
  3. Exchange of the car for a new one. If the car is in good condition, it can be used as a trade-in for another, which starts the entire contract again. The good part is that you will have a new car, the disadvantage is that you will have another three-year contract and you will have to pay the deposit. Maybe your “old” car is enough deposit? At this stage, you may be in a position to upgrade the car to something bigger, but remember you’re signing a new deal, so read the fine print again.

With installment buying, if you’re having a hard time keeping up with your payments or have already missed payments, contact your bank or finance company as soon as you can. They will often agree to change your agreement to make it easier for you to make payments.

If you and they agree to this:

  1. the bank or finance company may be entitled to charge you a reprogramming fee,
  2. the bank or finance company will extend the duration of the agreement, so you will have to pay additional interest to cover the longer period,
  3. the amount of the installment you pay each week or each month may be less, but it will take you longer to have the car because the contract has been extended. But this will help your cash flow – remember that income is your number one asset.

Even with these additional costs, changing your installment purchase contract will generally cost less than ignoring the problem and possibly repossessing the car. Changing your agreement also means you can continue to use the car. If you are unable to pay the refunds, you may terminate a lease-to-own agreement at any time. However, you must:

  • notify in writing and return the car
  • pay half the rent-to-own price, less your total payments to date (including any deposits you’ve paid). This is sometimes called the ‘half rule’
  • pay the cost of any necessary repairs if you have not taken reasonable care of the car.

If your car needs repairs…
Under a lease-to-own agreement, you have a duty to take reasonable care of the car. You can usually expect to receive a bill for repairs if the car is damaged when you return it. With car repairs, you might consider hiring a mechanic to look at the car and pay for any necessary repairs before you return the car to the bank or finance company.

You should contact your lender and tell them you want to finalize the installment purchase agreement under the “Half Rule.” Once you have paid half of the rent-to-own price, they must accept this decision.

Make sure you do NOT sign a voluntary surrender form when you drop off the car or you will have to pay the balance on the lease. If you sign a “voluntary resignation form”, you give up your right to end the agreement under the half rule.

When you have an installment purchase agreement, most lenders send the details of the repayments you make to a credit reference agency. This information builds your credit record (or history), and the CCR keeps details of your settlement payments (such as any payments you missed or didn’t pay on time) for five years after the settlement ends.

You can get a copy of your credit record from CCR for free; it takes 4/5 days. You cannot obtain information about your credit history over the phone, as credit reference agencies must keep your information confidential. If you end a lease-to-own agreement early, return the car, and pay what you owe, your credit history will not be affected. The deal will show as completed.

Now you know: drive carefully!

For more information, click on John Lowe’s profile above or on his website.

The views expressed herein are those of the author and do not represent or reflect the views of RTÉ.

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