Ciara's Car: Comparing Two Ways of Paying for It
Ciara is 22 and works as an apprentice electrician, taking home €2,150 a month. Her fixed outgoings are €780 rent, €190 utilities, €120 phone and broadband, and €260 on groceries and travel. She has €2,300 in a credit union account and no other savings.
She needs a car for site work and needs €9,000 to buy it. The two options on the table are:
- Credit union loan: €9,000 over three years at 9.5% APR, monthly repayments of about €287.
- Dealer hire purchase: €1,500 deposit, 36 monthly payments of €245, and a final balloon payment of €2,400 before she owns the car.
Insurance for a 22-year-old on this car is quoted at €1,650 a year, road tax is €280, and she estimates €140 a month in fuel and servicing. The dealer offers a free service plan for the first year if she signs before Friday. Her mother has offered to lend her €1,500 interest-free, repayable 'whenever', towards whichever option she chooses.
1. Compare the total cost of the two finance options over the full three years and recommend one. Show your workings, and explain why comparing the two monthly payments, or the APRs alone, would mislead Ciara.
Read the worked answer
Total cost over three years
| Credit union | Hire purchase | |
|---|---|---|
| Up-front | €0 | €1,500 |
| Monthly | 36 × €287 = €10,332 | 36 × €245 = €8,820 |
| Final payment | €0 | €2,400 |
| Total paid | €10,332 | €12,720 |
| Cost of credit | €1,332 | €3,720 |
The hire purchase costs €2,388 more - about €66 a month more than the credit union loan, despite the lower monthly figure.
Why the headline numbers mislead. The dealer's €245 is €42 a month cheaper than the credit union's €287, so on a monthly-payment comparison the dearer option looks like the bargain. The dealer also never quotes an APR, so the real price of the credit is invisible. The balloon payment is the trap: €2,400 falls due in month 36, she owns nothing until it is paid, and a lump sum three years away feels smaller than it is. The only fair comparison is total cost of credit, plus the APR as a check.
The free service plan is a nudge to sign quickly. Even valuing it generously at €250, hire purchase is still roughly €2,100 worse.
Affordability. €287 is 13% of her net pay and leaves her about €500 a month after the car and her fixed costs - tight but workable. Running costs (€1,650 + €280 + €1,680 = €3,610 a year, about €300 a month) apply either way, so the car really costs her roughly €590 a month.
Recommendation: the credit union loan, once she confirms she meets the membership and savings conditions and that the 9.5% is fixed. If €287 is genuinely unaffordable, the answer is a cheaper car, not hire purchase.
2. Ciara wants to put her €2,300 savings and her mother's €1,500 towards the car so that she borrows as little as possible. Advise her, using the figures.
Read the worked answer
The gain is real but modest. Borrowing €3,800 less over three years at 9.5% saves roughly €550 in interest and cuts the monthly repayment from €287 to about €166. That is a genuine saving.
The cost is liquidity. Her essential outgoings are about €1,350 a month (rent €780, utilities €190, phone €120, food and travel €260). A three-month buffer is therefore about €4,050 - and she does not have that even before touching her savings. If she empties the account and the car needs a €700 clutch in month four, her only options are missing a repayment (damaging her record and triggering fees) or a moneylender, where the cost of credit is many times the 9.5% she was trying to avoid. That is a bad trade: saving €550 to risk a loan at a triple-digit APR.
The family loan needs terms. Interest-free money from a parent is the cheapest credit available, but it is not free: it carries an obligation, it is invisible to the credit union, and it can go wrong if her mother needs it back at short notice. She should agree the amount, the repayment schedule and what happens if either of them needs the money early - in writing, even informally.
Also check before withdrawing: credit unions often require a member to keep savings on deposit as security against a loan. Withdrawing first could reduce what she is allowed to borrow, or change the terms.
Judgement: keep €1,200–€1,500 of her own money as an emergency fund, use the rest plus her mother's €1,500 to reduce the loan to about €6,000–€6,500, and take the €1,500 only if the terms are clear and her mother genuinely does not need it.