LAST UPDATE | 19 Jun 2018

BUYING A CAR can be a tricky process to say the least, and over half of you didn’t realise that your car can have no equity by the time you go to buy a new one. This is all according to a car finance survey we put to our readers last week.

So, how did TheJournal.ie’s readers pay for the last car that they bought? Over a third opted for savings (34%), followed by a personal loan (32%), while 13% of you opted for a personal contract plan or PCP.

(Here’s a handy visual explainer of what a PCP actually is).

CCPC CCPC

“Consumers spend a lot less time considering finance options than what they’re buying. On average, they spend about 4.5 times longer considering the cars that they’re buying than choosing how to pay for them.”

This might not seem significant, but when you consider that the average size of a personal contract plan for example is around €25,000, it becomes very important.

Áine Carroll is the Director of Communications and Market Insights at the Competition and Consumer Protection Commission (CCPC). Her team is the first to study the new ways that Irish consumers are paying for their cars - including personal contract plans or PCPs.

As Carroll explains, they’re becoming a popular option: “In 2016 67% of new cars were purchased using either hire purchase or PCP. Approximately one third of new cars and around 12% of second hand cars were bought using PCP.”

When it came to possible consequences of your car finance choice, nearly one in five (19%) of you weren’t sure if your credit rating could be affected by missing car payments, and over a quarter (27%) weren’t sure at which point you own your car with PCP.

And what influences your decisions for how to pay for a new car? An astounding 64% stated that low monthly repayments were the most important, while 12% said it was ‘convenience’ and 9% ‘a straight-forward approval process’. Carroll reminds consumers that though PCPs might be initially cheaper, not to forget about the final, large payment:

This is not unique, we see it across all financial products. In our focus groups we found that PCPs were considered cheaper than say a Credit Union loan but they missed the very important point that a large percentage of the car is paid at the end.”

Importantly, the most likely thing to put TheJournal.ie‘s readers off a particular type of car finance was a large payment at the end (39%), followed a quarter who said by ‘a large deposit’, while 18% said that not owning the car from the outset would put them off.

This element of car ownership is actually an important one for those whose circumstances may change, who Carroll warns to be careful of PCPs:

With PCP if you run into difficulty, it’s not like a car loan of €14,000 you might get from the Credit Union. With that you can sell your car and pay back the loan. With PCP you don’t own that car so you don’t have that option or flexibility in order to come up with the money.

Unfortunately, it is possible for a car to have no equity at the end of a contract (though nearly 30% of you did not realise this, and 21% weren’t sure), meaning that sometimes your old car can’t go towards the cost of your next one. Carroll explains how this happens:

Car values are volatile – the level of import can affect this, or a consumer can have broken the mileage and wear and tear agreements which can result in a financial penalty.

“Availability is also a factor. If a lot of cars have been bought on PCP there will suddenly be a lot of three-year-old cars on the market three years down the line”, explains Carroll, which means that trade ins aren’t going to be worth that much.

Though PCPs may be seen as a better option for those who can’t get a loan approval elsewhere, Carroll warns that every credit agreement you enter into appears on your credit history, by organisations such as the Irish Credit Bureau. And it’s not something that disappears quickly:

A lot of people don’t realise that your history is retained for five years after closing an account. It doesn’t disappear which is very important.

Ultimately, it you can’t afford a new car, that might be the answer unfortunately, says Carroll, who warns not to forget that with a PCP the cost is placed to the end of the agreement:

PCP might look cheaper but what happens at the end? It’s not just the cost of the car, it’s tax, insurance, servicing. You don’t want to take out a PCP on a car that you can’t afford to run.

Worst case scenario, you can just end the agreement, right? “Some people think I’ll just walk away at the end but then you have been paying for a car for three years and you have nothing to show for it.”

If you’re in the market for a car, Carroll warns that you need to take a very concise look at your finances before you ever consider what kind of car you would like to drive:

Consider your own budget. We have a really concise budget calculator. Your income is important but if you have a child in créche or you’re supporting a parent, you need to work out what level of that is allocated elsewhere.