Car Finance - Optional Final Payment

tempnam

Looks like a may need to change my car soon. I was looking at a loan from a bank for a used car Vs finance from a dealer for a new car.

On the face of it the monthly repayments of both options were fairly similar, so I was considering a new car. Then I saw the "Optional Final Payment" quoted on the car dealers websites...

I'm not 100% sure how this works...

Example (figures not accurate):
If I bought a new car for say €20K - paying a deposit of say €5K and then 36 monthly payments of say €450... I would then still have to pay a lump sum of around €6K at the end of the term....

I'm a little confused as to what this is for! Is the finance through the dealer essentially a lease agreement? If I choose not to pay the lump sum what are my options other than give the car back? Can I continue paying monthly repayments, or can I upgrade to a new car again?

Thanks in advance for the info!

MrDerp

tempnam wrote: »

On the face of it the monthly repayments of both options were fairly similar, so I was considering a new car.

That's exactly how they want to present it to you, and how they want you to think

tempnam wrote: »

I'm not 100% sure how this works...

Step 2 in their dastardly plan

tempnam wrote: »

I would then still have to pay a lump sum of around €6K at the end of the term....

Gotcha now sucker

tempnam wrote: »

I'm a little confused as to what this is for!

To own the car

tempnam wrote: »

Is the finance through the dealer essentially a lease agreement?

Yes

tempnam wrote: »

If I choose not to pay the lump sum what are my options other than give the car back? Can I continue paying monthly repayments, or can I upgrade to a new car again?

This is exactly the dilemma they want you to have at the end of the agreement. You will own nothing, your payments and deposit will have been for the use of the vehicle for 3 years, and for its depreciation.

They will give you a 'generous' value on the car at the end, so you will have the option of paying e.g. 6K for the car, or they will 'value' it at 9K and give you a 3K deposit towards starting the scheme again with a new vehicle.

So your options are:
- Get a loan to finish buying the car
- Hand the car back and make alternative arrangements for your transport
- Avail of this 3k deposit to begin the process again

So you're weighing up the following options:
- Buy a used car over 3 years and own it
- Rent a lovely new car for 3 years
- Get into the habit of renting a new car every 3 years

coylemj

It's known as a 'balloon' payment and as the previous poster has said, it's to make the monthly payments look attractive. In most lease deals there is this type of hook which serves to encourage you to do another deal with the same vendor when the original lease expires rather than walk away, it's why most of the major motor companies have leasing subsidiaries to finance these deals.

If there was no balloon payment, the original monthly payments would be higher and you would be a free agent at the end of the lease since you would own the car outright.

lomb

The value tends to be quite low. You could happily buy the car at end of the term and resell it privately so its not a bad deal. Remember though the deposit and monthly payments are 'wasted' with nothing to show. In fact if after a month you wish to hand the car back then they will insist on probably 6 monthly payments additionally to do so. Just factor that into your calculations.

Chris_Heilong

tempnam

But.... If I took out a smaller loan over say 3 years and bought an older used car - at the end of the 3 years I would have to take out another loan if i wanted to 'upgrade' to another used car. So I'd still be constantly be paying out each month anyway...

So they will never waive the final balloon payment if you continue the lease agreement with a new car? You'd still be required to pay the entire final sum??

Del2005

tempnam wrote: »

But.... If I took out a smaller loan over say 3 years and bought an older used car - at the end of the 3 years I would have to take out another loan if i wanted to 'upgrade' to another used car. So I'd still be constantly be paying out each month anyway...

If you take a loan from the bank at the end of 3 years you'll have a car to sell or keep. If you take the finance from the garage at the end of 3 years you'll have to either hand back the car or buy it.

If you want to change to a new(er) car every 3 years there's cheap way of doing it. With the bank loan you don't have to change after 3 years as you'll own the car, with garage finance after 3 years you'll own nothing and will need to go through the same decision process again.

tempnam wrote: »

So they will never waive the final balloon payment if you continue the lease agreement with a new car? You'd still be required to pay the entire final sum??

They won't make any money doing that and making money is what all companies are about. The only way to avoid the final payment is to walk away and buy/lease a car somewhere else.

uncle_sam_ie

I think I rather change to a new car every 3 years. Cars depreciate so fast these day. Is it really worthing owning it in the end.

Chris_Heilong

uncle_sam_ie wrote: »

I think I rather change to a new car every 3 years. Cars depreciate so fast these day. Is it really worthing owning it in the end.

Buy a car you like and sod selling it in the future. Why rent a car when you could own one.

uncle_sam_ie

Irish roads are so hard on a car it just doesn't seems worth holding onto it. I always think of car payments like the electricity bill anyway. Something that just has to be paid.

ofcork

So they will never waive the final balloon payment if you continue the lease agreement with a new car? You'd still be required to pay the entire final sum??[/QUOTE]

Most dealers have 3 options at the end of the 3 years,pay the balloon payment or trade for a new car and start paying again or hand the car back.The dealers have what they call gmfv on the car guarenteed minimum future value depends on the condition and mileage of the car iirc.

Scortho

Chris_Heilong wrote: »

Buy a car you like and sod selling it in the future. Why rent a car when you could own one.

It's ireland. What do you expect?

Bitten & Hisses

There must be very generous commission for sales people if they get you into one of these finance agreements. I was involved in buying two 131 reg cars earlier this year, for my wife and my mother. In both cases, the trade in was fairly new and finance was not required. In 2 separate premises, a VW and and Audi sales person both tried to shoehorn one of these finance arrangements into the deal, even though it was clearly not required.
They obviously assumed we were thick and would finance the car (for a much greater amount than the actual cost to change), accept a cheque up front from Volkswagen bank, then pay the optional future payment in 3 years. This for a customer who changes car every 2 years without exception!
When I expressed concern that the guaranteed minimum future value for a 3 year old A4 was on the low side, the salesman told me not to worry and that the value would actually be far higher, even though it couldn't be guaranteed in writing. The same guy was probably telling people in 2007 that house prices never fall!
My 2 cents: run very quickly from any of these finance deals which hinge around the minimum future value of the car. At least with conventional HP, you know what you're paying, for how long and you own the thing at the end of the term.

darragh o meara

Is it easier to get approved for HP than it is for finance?

With a lot of people with tarnished credit history over the last few years, is this an easier option for the finance companies to keep a hold on their property in the event the customer defaults.

Scortho

The only advantage of hire purchase that I can think off is the half back rule.

Autosport

Why is the last balloon payment on finance so High???? My last payment was only 50 euro more than the monthly payment. Delighted i've finished with all that now.

Scortho

Autosport wrote: »

Why is the last balloon payment on finance so High???? My last payment was only 50 euro more than the monthly payment. Delighted i've finished with all that now.

To make the monthly payments look cheap and shift cars.
It's a win win for the dealer.
Balloon payment is paid they make money.
Balloon payment isn't made they get car back and still make money.

Only benefit to customer is that they can push out the price of a new car if they so desire down the line and think about it in three years time

Reminds me in a way of endowment mortgages.

Bigcheeze

What's the typical APR on these finance deals ?

coylemj

Bigcheeze wrote: »

What's the typical APR on these finance deals ?

Lease deals are so convoluted with upfront deposits and balloon payments that APR rates (even if they're quoted) are pretty meaningless because a consumer can't independently arrange a comparable financial product.

knifey_spoonie

Guys i think your getting a Minimum future value mixed up with a balloon payment. Balloon payments are a lump sum which mustbe paid at the end of a term.
MFV is an optional payment at the end of the term. Also the person has first option to buy the vehicle at the MFV which is designed to to leave the vehicle in equity.

PCP can work for some people, but only generally with a small upfront deposit. The ideal deposit amount would be similar to the predicted equity which would be left in the vehicle in 3 years time. In my experience you will find the GMV will be about 10-15% below expected prices. Therefor the person can roll over to another new vehicle for similar money. This is what can appeal to people, new car every 3 years.

You will generally find a 3 year pcp will have similar monthly payments to a 5 year hire purchase.

Its really very new finance option to the Irish market, its being used in the UK for yonks. Its also the reason for the availability to nice 3 year old uk imports. You will even see PCP figures on the price index on the top gear mag.

mickdw

I think this thread is a little harsh on this type of finance. The way I see it is this.
If you can afford the repayments while only putting down a small deposit (a deposit similar to what you will have available to you in 3 years due to equity in the car you are handing back), it is a reasonable and sustainable way to drive a new car every 3 years provided that the interest rates are low.
If on the other hand, you currently own outright a car of significant Value
15k for example. You then take one of these finance deals to get into a new car without realising that in 3 years, you will not have 15k to put forward again. That is not a sustainable solution. I fear a large portion of new car sales are in this bracket. Basically, people are throwing away build up Value in their car for the sake of one new car for 3 years and then finding themselves back to square one after 3 years and unable to get into a similar car new again. 70 percent of audi sales this year have been finance with final payment.

Also, just to clarify, it was mentioned earlier in the thread that garage finance means you own nothing after 3 years. It is possible to get more traditional finance through the dealers / manufacturers where you buy the car outright over 3 or 4 years. These are much more competitive that the banks these days.

naughtysmurf

knifey_spoonie wrote: »

Therefor the person can roll over to another new vehicle for similar money. This is what can appeal to people, new car every 3 years.

Isn't this what the manufacturers really want, it helps tie you to a certain brand / model whether you want to or not, keeps their new car sales ticking over & gives them a supply of 3yr old car to trade.

A lot of people when told, well you have to give us 7k or get a new model for the same / similar monthly payment, will opt for the new car

MrDerp

mickdw wrote: »

I think this thread is a little harsh on this type of finance. The way I see it is this.
If you can afford the repayments while only putting down a small deposit (a deposit similar to what you will have available to you in 3 years due to equity in the car you are handing back), it is a reasonable and sustainable way to drive a new car every 3 years provided that the interest rates are low.
If on the other hand, you currently own outright a car of significant Value
15k for example. You then take one of these finance deals to get into a new car without realising that in 3 years, you will not have 15k to put forward again. That is not a sustainable solution. I fear a large portion of new car sales are in this bracket. Basically, people are throwing away build up Value in their car for the sake of one new car for 3 years and then finding themselves back to square one after 3 years and unable to get into a similar car new again. 70 percent of audi sales this year have been finance with final payment.

Also, just to clarify, it was mentioned earlier in the thread that garage finance means you own nothing after 3 years. It is possible to get more traditional finance through the dealers / manufacturers whet toy by the car outright over 3 or 4 years. These are much more competitive that the banks these days.

Yeah, I tend to be harsh on finance in general though. While plenty of people go into these things with their eyes open, plenty of people don't. I find convoluted schemes like this to be a little predatory on people who are wooed by new cars.

Now, if I was the type of person who bought a new car every 3 years, and did llow-middling mileage (leaving equity likely in the car, and never needing a deposit again) then this would probably be very attractive to me.

My worry is for people who typically wouldn't buy a new car, and are now attracted by the low monthly payment. "I have 5k in savings, and I give that to Mr BMW dealer, he'll give me a 3-series for 350/month". I worry about those people, because if they lose their job next year and have to give up the car they'll have sunk 9,200 into the use of a new BMW for a year.

It's a lifestyle purchase, and suits people with a good standard of living. I worry about the aspiring classes though.

So in general my thoughts are: "If you're a regular new car buyer anyway, rock on, if you're a regular used-car buyer intrigued by the deal, be wide and weigh up the risks"

DriveSkill

Personally when I was looking earlier this year I found these deals not to be great value for what I wanted but all of the sales guys were pushing them. If like me you have any indication of buying out the car at the end I think they work out much more expensive, if you are happy to continue indefinitely with car payments for the comfort of always having a relatively new car then they may suit but equally in this case you never have any real equity in the car and may need to come up with a couple of grand every 3 years to make a decent deposit and keep the monthly repayments affordable.

One point I think is important if you are thinking of buying out the car at the end is to work out the TOTAL cost. If you take the OPs example of the €20K car it would end up costing a minimum of €5K + €16.2K (450*36) + €6K = €27.2 which to me is a huge APR over 3 years. The reason its a minimum is that this assumes you have the €6K available in 3 years which you dont need to finance, if you need to finance that again then the car will end up costing you more.

Personally I think a better option would be to take a €20K car, pay €5K deposit and finance the €15K over say 4 years at around €380 per month (total cost of car is €23.2K) and at least you own the car at the end to do with what you want. Even if you want to change in 3 years you have some decent equity in it.

BTW I know all the figures are made-up so obviously you'd need to work out each individual case but hopefully you get the idea!

Drummerboy08

Chris_Heilong wrote: »

Buy a car you like and sod selling it in the future. Why rent a car when you could own one.

Why would you want to own a depreciating asset?

This type of finance arrangement isnt HP with a balloon at the end of it, its Personal Contract Hire. Its been the norm in the UK and Europe for many years, and it makes sense unless you're buying a car to keep it for the next 20 years.

Its not the dealer "trying to stroke me", its simply another avenue which to get a new vehicle.

dantastic

As an alternative idea.
If you were to save hard for the next 3 years you will be able to walk in to the showroom and buy the car out right or with very little finance. If you have 80% of the full price finance will be very reasonable.

After that you keep on saving at the same rate and 2 years later you can go back to the dealer looking to upgrade. You own the car so the money you have been putting away together with the car will get you the new model out right.

Your money will be working for you the whole time. At any time you can decide what to do and invested sensibly you may only have to put in something like 18k of earned money to purchase the 20k car!

tempnam

dantastic wrote: »

As an alternative idea.
If you were to save hard for the next 3 years you will be able to walk in to the showroom and buy the car out right or with very little finance. If you have 80% of the full price finance will be very reasonable.

After that you keep on saving at the same rate and 2 years later you can go back to the dealer looking to upgrade. You own the car so the money you have been putting away together with the car will get you the new model out right.

Your money will be working for you the whole time. At any time you can decide what to do and invested sensibly you may only have to put in something like 18k of earned money to purchase the 20k car!

Problem with that though is that my current car won't last 3 more years as it is. In order to do that it would cost a small fortune in repairs - eating into savings!

Just to clarify... At the end of 3 years, if you want to upgrade to a new car do you still need to make the final payment on the current car or simply hand it back?

If it's just a case of handing it back - do you just continue with monthly payments, (if taking a new car) or are there any other deposits / lump sums involved?

DriveSkill

tempnam wrote: »

Just to clarify... At the end of 3 years, if you want to upgrade to a new car do you still need to make the final payment on the current car or simply hand it back?

At the end of the 3 years you can upgrade to a new car and they will work out how much equity you have in the current car which basically becomes your deposit.

So in your example the €6K value was the GFMV (Guaranteed Future Minimum Value) but the assumption is the real value will be more. Lets assume they value the car at €8.5K when you come to change so now you have €2.5K (€8.5K - €6K) as a deposit on the new car.

The 'catch' is you will almost certainly need to top-up that deposit with cash in order to keep your repayments the same as for the first 3 years, in your example the original deposit was €5K so assuming same purchase price you would need a €2.5K deposit in cash to get you to the same place.

R.O.R

tempnam wrote: »

Problem with that though is that my current car won't last 3 more years as it is. In order to do that it would cost a small fortune in repairs - eating into savings!

Just to clarify... At the end of 3 years, if you want to upgrade to a new car do you still need to make the final payment on the current car or simply hand it back?

If it's just a case of handing it back - do you just continue with monthly payments, (if taking a new car) or are there any other deposits / lump sums involved?

Taking totally made up figures, but should give you an idea of how it works.

You go see Mr. Audi about an A4. He say's you'll need to give him €5,000 deposit, then €500 a month for the next 36 months. He also says the Gauranteed Future value of the car is €14,000.

In 3 years time, you call back to Mr. Audi. He tells you your A4 is actually worth €17,000, so your options now are:

Do the same again. He's giving €17,000 for the current car, so you have €3,000 of the €5,000 deposit you need for the next lease deal.

Buy the car off Mr. Audi for €14,000 and head off happy you bought the car for less than its worth. Can sell it the next day for €17,000 if you are lucky.

Hand the car back to Mr. Audi, and get the bus home.

It's handy that you know what your costs are going to be for the next 3 years on car payments, and you have the comfort that the car isn't going to be worth a pittance when you try to trade it in.

Even if the market goes south (again) and it turns out the true value of the A4 in 3 years time is only €7,000, then you can just hand it back and walk away.

Chris_Heilong

Drummerboy08 wrote: »

Why would you want to own a depreciating asset?

This type of finance arrangement isnt HP with a balloon at the end of it, its Personal Contract Hire. Its been the norm in the UK and Europe for many years, and it makes sense unless you're buying a car to keep it for the next 20 years.

Its not the dealer "trying to stroke me", its simply another avenue which to get a new vehicle.

Because I am buying a car not an asset, I would say the same for houses, I would never throw money to the wind for the pleasure of just using something, I am a believer in buy it and its mine but courses for horses.

Nickindublin

PCP seems to be only the big manufacturer's like VW Audi BMW are doing these using there own finance banks. As for balloon payments are these still available these days thru garages? Thought the credit crunch would have finished that... Tell me if I'm wrong...

I had a PCP before and didn't really like it. So I just bought current car outright.... But everyone is different.....