New car? The lure of ownership could cost you a pretty penny
If you’ve just got to have a new car, there are some tough decisions you’re going to have to make
Is it the shiny bonnet, leather smell or zero kilometres on the clock? New cars have plenty of appeal, but the biggest question remains how to pay for them.
For thousands of people, the answer is a Personal Contract Plan (PCP). The garage does the paperwork, the interest rate is super-low (or even nothing at all) and your acceptance chances are higher than begging your bank manager. So what’s the catch?
On one hand, PCPs, or Hire Purchase plans, do everything they say on the tin. You get a new car at low cost and the garage gets a sale. Why would anybody go elsewhere?
The answer has to do with ownership. A PCP means that your car is no more yours than it would be had you picked it up at the airport from Hertz.
It is hired, rented, leased (pick your terminology), until the very last payment is made. As this can be anything up to five years, it’s a long term commitment to remain in a job, afford the payments and not want to change model.
Some 64,716 new cars were registered in the first quarter of 2015, up 30pc on last year, indicating a return of consumer confidence. When it comes to turning corners out of recession, it seems we want a new set of wheels to make the manoeuvre.
Tom Cullen of the Society of Irish Motor Industry (SIMI) says the top three marques are Volkswagen, Toyota and Ford, and claims PCPs are “a fantastic product, hugely popular and a real growth area”.
Despite this he says Ireland has a relatively immature market. “In the UK, up to 80pc of new car sales are via PCPs. Many manufacturers like Volkswagen and Renault have their own banks,” he says. “During the recession people had stopped changing their car and we ended up with an eight or nine-year-old fleet.
“Having fallen out of the loop, many are seeing increased job security and coming back into showrooms and making the leap to new with a PCP, with guaranteed values when the contract is over.”
The rates certainly are attractive. Both Opel and Citroen offer 0pc finance on many models. Seat has credit at 3.9pc, Peugeot from 4.9pc and Volkswagen from 5.9pc — all much lower than the 11pc to 14pc you can expect on a bank loan.
However, deposits required are generally between 30pc and 50pc and terms are shorter. With Opel, for instance, repayments are for a maximum of 24 months and half the cost upfront is required. The bank won’t lose, as the depreciation will be less than the value upon its return.
With some, such as Citroen, the deal is more complicated. The deposit is a minimum 30pc, and the car is given a Guaranteed Minimum Future Value (GMFV) by the bank (in this case, its own UK based finance house).
The GMFV is their reckoning of what the car will be worth after the three year repayment term and is dependent, among other things, on a maximum 20,000km per annum mileage limit and keeping it in good condition. Cullen says this is typical.
“The PCPs do come with terms and conditions — but if you’re an average driver with average mileage looking after your car, it’s fine.” A worked example for the C1 Touch VTi looks like this:
On the Road Value: €11,145
Deposit: €3,344 (30pc)
Repayments: €108.36 x 36 months (€3,901)
Cost of Finance: 0pc
On the surface, it’s a no-brainer — repayments are kept low because you’re not making them all during the term. The use of the GMFV leaves you with three options: (a) return the car, just like you would a hire car, and walk away; (b) pay the outstanding balance of €3,901 (commonly called a ‘balloon payment’) or (c) roll over the loan into a new car and start the process again.
The difference with a credit union or personal loan is that borrowings are unsecured, meaning that although they will certainly chase you if you fall behind on payments, they can’t rely on the security of the asset to recoup the loss.
This is why you pay higher interest — it is for the added risk. The car is your property and it cannot be taken from you. It means that if say, you lose your job, at least you have your motor to get to interviews.
If your car is financed through PCP, it is deemed a ‘secured’ loan and remains the property of the finance house and can technically be taken from you and sold to pay off the loan.
But there is an out, as Susan Cosgrove of Cosgrove Gaynard Solicitors explains.
“Under S.63 of the Consumer Credit Act 1995 there is a protection known as the Half Rule. This entitles you to terminate a hire purchase agreement and pay 50pc of the hire purchase price.
“A 2011 High Court decision, Gabriel vs GE Money, ruled that the Act provides this as a standalone right at any time before the final payment falls due. Under section 63(2) there are two options: pay half the hire purchase price less the amount paid to date or purchase the car from the HP company.
“Otherwise, the bank has the right to recover the vehicle immediately and is entitled to issue proceedings for the balance if not so paid.
“Importantly, the court also found that the practice of some finance companies in refusing to accept back cars where agreements were terminated by a hirer was wrong.
“It ruled that they cannot treat the payment of 50pc as a precondition to termination and therefore a company cannot refuse to take the car back in advance of the sum being paid avoiding purchasers having to hold on to cars they couldn’t afford.”
What should be avoided is signing an Voluntary Surrender Form which would make hirers liable for the balance of the loan, while still returning the car.
But perhaps the real truth is, if it’s the only way you can afford new, maybe the second-hand market is the one for you.