Have you been holding out on upgrading your car these last few years? When the boom went bust, did you start making trips to the mechanic rather than the car salesman? Is it finally time to upgrade? If so, you’ll be joining thousands of others who are now getting a newer car. In fact, the Society of the Irish Motor Industry (SIMI) has recently revealed that new car sales were up by 23% in the first half of the year, already more than all car sales in 2013.

This trend can be seen across the country. Leitrim has seen the biggest increase in new car sales, up 51% for the first half of 2014. Although Dublin has showed the lowest increase, at 14%, it still has the highest percentage of new car sales, with 38% of all new cars being sold in the capital.

Sales hit an all-time high on 1 July, when the 142 cars were launched onto the market. Suzanne Sheridan, spokesperson for the SIMI says: “A total of 4,264 cars were sold that day. That’s the highest single day of sales since 2008.”

Finance option

If you have upgraded or it’s on the family agenda, one of the most important questions to think about is how are you going to pay for it? When you’re sitting in the plush sales room and you’re offered finance, it can seem like the quick and easy option. Don’t get us wrong, it is. However, do you know what kind of financial contract you are signing?

The vast amount of car finance offers that are presented to customers are hire purchase agreements. In fact, in June 2014 there were 4,752 finance agreements signed for cars and motorcycles. These do not include Personal Contract Plans (PCPs), which is another form of a hire purchase.

Comparing packages

So what’s the difference between hire purchase, PCPs and a standard car loan? Siobhan Howe, head of communications and marketing with the National Consumer Agency (NCA) explains.

“When you go into the bank or the credit union and apply for a car loan, you get the loan, purchase the car and make the re-payments. The car is yours and if you run into any financial trouble, you always have the option of selling the car to clear off the loan.

“With a hire purchase agreement, the finance company buys the car from the dealer. You then make the repayments to the finance company. The real difference is the car is not legally yours until the very last repayment has been made. So if you run into financial trouble, it’s not just a matter of being able to sell off the car.”

That doesn’t mean that as a consumer you don’t have options. There are two rules to bear in mind when you take out a hire purchase agreement: the half rule and the third rule.

The half rule

“The half rule is part of the Consumer Credit Act 1995 and gives you the right to end a hire purchase agreement at any time, although there is a good chance you’ll incur penalties,” says Siobhan Howe.

It limits whatever you owe to half the hire purchase price of the car. However, that doesn’t mean that you have to pay all of that amount immediately.

“If you’ve already paid half and you can’t afford to keep up the rest of the repayments, you can hand over the car, but you will be liable to make any necessary repairs. This can be pricey when you consider that you’ve paid a substantial amount for the car, but now you have nothing to sell off,” adds Howe.

The third rule

On the other hand, the third rule means that if you fail to make your repayments and less than a third of the car is paid for, the finance company can take the car back without taking any legal action. If you’ve paid over that amount, then lawyers will have to be called upon before they take the car off you.

According to Siobhan, it really is very important to read the small print in your financial contract. One thing to keep a close eye on is whether your hire purchase agreement is a PCP.

PCPs

“PCPs are relatively new. They are usually on high-end cars and have only been around a few years. They can appear to be very attractive as the monthly repayments are usually lower than what you’d be repaying with a loan.

“However, there is a catch. Usually at the end of the contract you, as a consumer, have to pay a balloon payment.

“This is basically a lump sum payment that you have to make before the car is yours. In some circumstances, it can be significantly higher than your usual monthly repayment,” explains Siobhan.

Read the Ts and Cs

For this reason, it’s really important that consumers read their hire purchase agreement in detail and see what is the total cost of repayments, rather than just the monthly fees. It’s important to compare like with like when deciding to take a hire purchase agreement or a loan.

Siobhan advises: “Don’t just make a quick decision on the forecourt, with your shiny new car clouding your judgement.”

That’s not to say that hire purchases agreements are a bad financial decision.

“To be honest, it really suits some people. It is very convenient and sometimes the idea of making lower repayments in the short-term works well for an individual’s circumstances.

“Although the NCA has had 166 calls on hire purchase agreements to our helpline in 2014, most people find no issues with them. It is just important to note that it is a different financial contract to a loan and if the repayments start to become a struggle, different rules apply,” she concludes.

Additional information

Hire purchase fees

“You are entitled to a list of all additional charges and fees, so ask for this before you sign any agreement,” says Siobhan.

Documentation fee

This is a fee for setting up the agreement. It can vary from €50 to €100.

Interest surcharge for missed repayments

This means a higher rate of interest may be charged on the repayments you missed.

Penalty fee for missed repayments

This is charged for missed or late payments, in addition to the interest surcharge. It is usually about €60.

Completion fee

This is a fee charged to end the agreement and to allow ownership of the goods to pass to you. It is usually around €60.

Repossession charge

If the finance company repossesses the goods, you will be charged a fee, usually around €300.

Rescheduling charge

If your lender agrees to change the terms of the agreement, you may be charged about €60 extra.

For more information log onto www.nca.ie