Tuesday 25 April 2017

Why motorists are now flocking to PCPs in their droves - but they should be aware of the pitfalls

Irish Independent Personal Finance Editor Charlie Weston on the pros and cons of various forms of car credit

There are both pros and cons to PCP deals
There are both pros and cons to PCP deals

There has been a surge in car buyers using PCPs (personal contract plans) to finance their new motors.

But motorists have been warned they may end up out of pocket when the time comes to trade in their cars.

Financial experts have advised that anyone buying a new or second-hand car should not forget there are plenty of other options to consider before rushing to sign for a PCP deal.

PCPs are becoming dominant in the car finance market. It is essentially a modern twist on the old hire purchase agreement. You pay a deposit, typically between 10pc and 30pc of the value of the new car. You then make monthly payments, usually for three years.

At the outset, you agree the mileage you are going to clock up.

If you keep to this, the car will have a pre-agreed value at the end of the deal, sometimes called the guaranteed minimum future value (GMFV).

At the end of the three years you have a number of choices:

* buy the car outright for the guaranteed value agreed at the start.

* hand back the keys and walk away.

* The option most people take is to exchange the car for a new model. You finance this with a new PCP deal.

PCP risks

The key is that the agreed minimum value at the end of the term of the deal is sufficient to cover the final payment.

Crucially, there should be enough value in the car over and above the agreed minimum value to include an amount of "equity" which can act as, or go towards, a deposit on the next vehicle.

This assumes you roll over your agreement into a new one, which most customers are expected to do.

However, if the value of the car falls below the agreed amount, any equity will disappear.

You could end up with nothing towards a deposit for your next car.

Motor experts have warned that there is likely to be a glut of three-year-old cars in the next while, as recently-taken PCP deals mature.

This is likely to push values down, meaning many cars bought with PCPs could be below their guaranteed minimum future values.

John Byrne of Cartell.ie, a website for checking if outstanding finance is owed on secondhand cars, warns of the dangers of PCPs.

He says a large number of PCPs are due to mature at the same time in the next year or two. "There are fears a large number of secondhand cars will be coming to the market at the same time and this will affect residual values."

PCPs started to take off in 2012 and, he says, next year will provide a clearer picture of how good a deal, or not, PCPs are as a number of them come to an end.

Mr Byrne advises caution. "People are only looking at the monthly costs. They are not looking at the overall costs with PCPs. For that reason I think they are expensive. Remember, you do not own the car."

He advised buyers to carefully consider all forms of motor finance.

Check-list

The key thing to remember about a PCP is that you do not own the car unless you buy it outright at the end of the agreed term. The small print - the bits to remember and watch out for including the following:

* High mileage could mean a lower minimum guaranteed value.

* A lot of wear and tear may also mean you do not get the full value of the car agreed at the start of the deal.

* If you have a crash and the cost of the repairs is greater than 66pc of the original list price then you may also not get the minimum value you were hoping for.

* Because a lot of the repayments are deferred, the interest costs may be low initially, but the total ends up being high over the full length of the agreement.

* Dealers and car company banks are able to offer lower interests rates on the deals for the first three to five years because they retain ownership of the vehicle, lowering their risk.

And we should not forget there are several other avenues of car finance.

Credit unions

Credit unions were traditionally where people went for car finance. And they have plenty of money available. Their rates are competitive, despite each one setting its own rates. Car-loan rates are often lower than others within the credit union, with some charging as little as 5pc.

The big advantage with funding through a credit union is that you own the vehicle, rather than leasing it, or effectively renting it as you do through PCP.

To borrow from a credit union, you need to become a member first and save with it.

To join your local credit union, you must be living in the area it serves, but you might be employed in a company that has a staff credit union or a member of a professional body that runs its own credit union.

The process is much like applying for a loan with a bank, in that you'll need, in this case, three recent bank statements and three payslips. It will also ask permission to check your credit history with the Irish Credit Bureau.

You will also need to provide evidence, such as a sales invoice, that you bought the car. This is to stop people pretending to borrow to buy a car, but then using the money for something else.

Hire purchase

Car buyers don't always realise that the car finance they are offered in salesrooms is actually a hire purchase agreement. This was traditionally a forecourt favourite. The key difference between a hire purchase (HP) agreement and a personal loan is that by buying a car with a personal loan you own the car as soon as you hand over your money.

With a hire purchase agreement, you do not own the car until you pay off every last cent on the deal.

At the end of the agreement, the finance company passes ownership of the car to you, provided you have made all the repayments.

Interest rates on HP deals are attractively low. Ford charges interest rates of as low as 5.25pc APR (annual percentage rate) on some models. This is competitive compared with the interest charged for a personal loan by a bank.

But with HP it is worth remembering you can have the car repossessed if you continually miss repayments.

If you are having difficulties meeting the repayments you may be charged a fee of €60 if the lender agrees to change the terms of the agreement, according to the Competition and Consumer Protection Commission.

You can have a penalty fee imposed for missed monthly repayments. In addition to this, you could have an interest surcharge added in.

You don't have to rely on the dealer for a HP deals. Banks and finance houses are now offering them.

AIB has a fixed interest rate of 8.45pc on its hire purchase deals, with a typical agreement for more than four years.

First Citizen, which also offers deals through the State's 1,100 post offices, is offering hire purchase deals, with typical interest rates of 8.5pc. A minimum deposit of 20pc is required.

Personal loans

Banks are back trying to tempt us to take out car loans.

Take a loan for €10,000, to be paid back over three years. AIB offers interest rates of 9pc, with monthly repayments of €316. The total cost of the credit works out at €1,309, according to the Competition and Consumer Protection Commission.

Permanent TSB claims you can get approval in minutes as long as you have a current account with the bank with your salary going into it. Its normal rate is 12.5pc.

But you can get an interest rate of 6.4pc if you use your savings as security against the loan. Monthly repayments work out at €305, with the total cost of credit €987.

KBC has a rate of 6.4pc for those who use its current account.

Bank of Ireland charges 7.5pc, for customers with current accounts with the bank.

UIster Bank charges 8.5pc.

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