Thursday 17 August 2017

Want a shiny new 172-reg car you can afford? A PCP is not the only show on the road


Stock Photo
Stock Photo

John Cradden

When it comes to financing a new or used car, personal contract plans (PCPs) have become hugely popular. Industry sources say around one in three buyers are opting for them, with some dealers reporting that they account for up to 70pc of their new car sales.

PCPs are popular because they make financing a new car seem more affordable due to very low monthly repayments and sometimes a smaller deposit, compared with other options.

But amid the arrival this month of 172-plate cars, PCPs have been coming in for criticism not only because of the way they are designed, but also because they are not regulated as a financial product by the Central Bank.

However, Michael Rochford, managing director of Motorcheck, said: "To suggest it is completely unregulated is a misnomer as PCP is a form of hire purchase, which is essentially asset finance, whereby you don't own the asset until the final payment is made.

"Like every form of finance, it has specific terms and conditions, which you must understand fully before entering an agreement, such as wear and tear and mileage restrictions."

But while they may not be bad products per se, they are quite complex and won't suit everyone, so reading the small print carefully and then considering the alternatives to this type of finance will help ensure you are not unwittingly out of pocket.

What is a PCP?

A PCP is a form of car finance based on a hire purchase (HP) agreement, but unlike HP, the monthly repayments are typically lower and at the end of the term you have the choice of whether or not to pay a final lump-sum 'balloon' payment to own the car.

What typically happens is that you trade in your old car and/or pay an up-front deposit of usually 10-30pc of the price of the new car, with the balance financed over a period of three to five years. At the end of this term, you will have three choices: 1) hand back the car 2) enter into a new PCP for a new car 3) pay off the final 'balloon' payment to own the car outright.

This balloon payment will amount to the car's guaranteed minimum future value (GMFV). The GMFV is based on the finance company's estimate (made at the beginning of the term) of what the car will be worth at the end of the repayment term.

It's worth stressing that a PCP usually comes with some conditions, including a limit on the annual mileage you put on the car (typically 15,000-20,000km) and a commitment to make sure it is serviced properly. This is to help ensure that the car is in good enough condition to be worth the GMFV at the end of the term.

In an ideal scenario, the value of the car could be more than the GMFV by the end of the repayment term. So, for example, if the GMFV is €9,400 but the car is actually worth €10,600, you have €1,200 in 'equity' to use as a deposit towards a new car on a new PCP.

However, there is no guarantee that this will be the case.

"You must be comfortable with the fact that there will likely be little or no equity in the vehicle at the end of the finance term, so if you want to enter a subsequent PCP, you will have to save for the deposit during the course of your first PCP, since you'll only have the positive equity in your old PCP to trade in, if anything at all," said Rochford.

"But even then, you have the flexibility of refinancing the car via a normal bank loan or HP agreement at the end of the PCP if you don't fancy handing it back."

Another point worth noting is that if you do want to roll over to a new car and a new PCP deal at the end of three years, you'll be restricted to the same make of car.

Read more: PCP - good value or an overly complex car 'hire-purchase' deal? Four things you need to know


A PCP is a form of hire purchase and it's easy to confuse the two types, but the main difference is that with a PCP you have the choice to make the final payment to own the car at the end of the repayment term or walk away. With a hire-purchase agreement, you are committed to paying off the car in full, although, like with a PCP, the car does not become yours until you make the final repayment.

The monthly repayments on a HP are usually higher because they are split more evenly over the term, rather than a series of small repayments with a large 'balloon' payment at the end, as is the case with PCP.

Having said that, some HP agreements are still structured with small deposits or 'balloon' payments at the end, so as to seem more affordable. If this is the case, you'll need to make sure you have enough to pay this balloon, otherwise you may have to refinance it, which means paying more in interest.

On the other hand, HP repayment terms can be more flexible, in that you can decide at any time to pay off the full HP value and become the owner of the car.

If you do, you should get an interest rebate. You also don't have any mileage restrictions or any other GMFV-type conditions.

So if you want to keep the car at the end, which option works out the cheapest?

For a base-model Citroen C4 Cactus Puretech 75 costing €18,720, and assuming you have 20pc deposit (€3,864) and a three-year repayment term at an interest rate of 4.9pc, the PCP would cost €284 a month and you would have to pay the GMFV of €6,762 at the end to buy the car outright. The HP deal would cost €458 a month, at the end of which you would own the car outright anyway.

But the cost of credit with the HP deal is nearly €500 less than PCP - €1,182 vs €1,680.

PCP vs a bank loan

While a HP or PCP is more convenient, they are much less flexible than a personal loan from a bank or a credit union. For a start, the interest rate is always fixed, which means you cannot usually increase your repayments each month if you want to.

Taking out a personal loan effectively makes you a cash buyer, so this may give you more scope to haggle on the final price and any car you have to trade in. You'll also own the car outright from the beginning.

The cost of credit for the cheapest €15,000 loan (at a variable rate of 7.5pcAPR from the Bank of Ireland) to buy the Citroen C4 Cactus (assuming you have the €4k-odd deposit already) would be €1,736.

But variable rate loans are also more flexible in that you can pay off your loan earlier or extend your term, usually without any extra charges or penalties for doing so.

Negative equity

But the one factor that could be the sting in the tail as far as PCP customers are concerned is the possibility that by the end of the repayment term on a PCP, the car would be worth less than the GMFV, even if you look after it. If so, you won't have anything to put towards a deposit on a new PCP deal.

"Handing the car back is probably the least favourable option, as you will have paid a deposit on the vehicle in addition to making repayments on the balance," said Rochford.

"However, handing the car back could work out favourably if the car has actually depreciated far more than the predicted GFMV. This protects the consumer from being left with negative equity."

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