Being confused can be as simple as placing three shovels up against a wall and being asked to take your pick ! Car finance can be equally as confusing. Do you know the difference when buying a car with a personal loan, hire purchase or personal contract plan ( PCP ) ? Confusing to say the least. John Lowe the Money Doctor simplifies and demystifies the choices.
With a personal loan, you own the car from day one but you have an unsecured loan with a lender who has taken a risk they will be paid back. For this risk, they charge a hefty interest rate.
If you have a hire purchase agreement you only own the car when the last “bullet” or balloon” payment is made on the loan. If you want to end the contract before that termination date and keep the car, you must generally pay the full hire-purchase price (the cost of the car plus interest and any other costs). You may get some discount on the amount of interest you have to pay if you are ending the agreement early. THIS DOES NOT NECESSARILY HAPPEN WITH PERSONAL LOANS.
With a PCP, there is the normal deposit and the usual 36 months term loan. However the fun begins after the three years as you have a number of choices :
- Keep the car and pay the final payment or finance the payment over another couple of years, either way the car becomes yours to keep when the final payment is made. You can do what you want with the car now.
- Hand back the car and make no further payments. This will be subject to the condition of the car and service history, if you’ve looked after it there shouldn’t be a problem. If all is well with the car you can just hand back the keys and walk away owing nothing more but remember you won’t have a car either as that goes back to the dealership. Your credit rating won’t be affected so long as you’ve made all the normal payments.
- Trade in the car for a new one. If the car is in good condition it can be used as a trade in on another one which starts the whole agreement again. The good part is you’ll have a new car, the downside is you’ll be back into another three year agreement and have to come up with the deposit. Perhaps your “old” car is sufficient deposit ? At this stage you might be in a position to upgrade the car to something bigger but remember you are entering into a new agreement so read the fine print again.
With hire purchase, if you find it difficult to keep up with your payments or you have already missed payments, contact the 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 rescheduling fee;
2. the bank or finance company will extend the length of the agreement so you will have to pay extra interest to cover the longer period; and
3. the amount of the instalment you pay each week or each month may be lower, but it will take you longer to own the car because the agreement has been extended. But this will help your cash flow – remember income is your number one asset.
Even with these extra costs, changing your hire purchase agreement will usually cost you less than ignoring the problem and possibly having the car repossessed. Changing your agreement also means you can continue to use the car.
If you cannot afford the repayments, you can you can end a hire-purchase agreement at any time. However, you must:
– give notice in writing and return the car;
– pay half the hire-purchase price, less the total of your payments to date (including any deposit you paid). This is sometimes called the ‘half rule’; pay the cost of any repairs needed if you have not taken reasonable care of the car.
Under a hire-purchase 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 could consider getting a mechanic to check 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 that you want to end the hire purchase agreement under the “Half Rule”. Once you have paid half the hire-purchase price, they must accept this decision. Make sure you DO NOT sign a voluntary surrender form when you leave back the car or you will have to repay the balance on the hire purchase agreement. If you sign a “voluntary surrender form”, you give up your right to end the agreement under the half rule.
When you have a hire-purchase agreement, most lenders send details of the repayments you make to a credit-reference agency, the Irish Credit Bureau (ICB). This information builds up your credit record (or history). The ICB keeps details of repayments on your agreement (such as any payments you have missed or not paid on time) for five years after the agreement ends. You can get a copy of your credit record from the ICB for a small fee. You cannot get information about your credit history over the phone, as credit-reference agencies must keep your information confidential. If you end a hire-purchase agreement early, give back the car and pay back what you owe, your credit record will not be affected. The agreement will be shown as completed. Now you know – drive carefully !