Checking under the bonnet of motor loans
Sinead Ryan examines whether PCPs are all they're cracked up to be when buying a new car
What's on your list for Santa this Christmas? While most of us will settle for our favourite perfume or some new clothes, thousands of people will be in line for a coveted gift... for their driveway.
It's been a record year for new car sales with 145,427 motors leaving garage forecourts to date. Final forecasts are around 147,000 for the year. Top new vehicle marques are Hyundai, Volkswagen, Toyota and Ford.
Of course, a new car is expensive and most people cannot afford to buy one outright. Nevertheless, orders are already being taken in garages all over the country for a shiny new 171 registration plate.
Unless it's being brought down the chimney by a generous Santa, the majority will need to pay in the usual manner. That means a loan and the most popular is a PCP.
Personal contract plans are like hire purchase on speed. They have grown exponentially in popularity as motorists, attracted by the seemingly ultra-low interest rates (sometimes even zero), cotton on to the fact that a few hundred euro a month can secure them an expensive and brand new motor.
There are no statistics available to show how many cars are purchased by PCP - the Society for the Irish Motor Industry says finance houses keep these figures close to their chests, but the UK market, which is more developed, sees around 70pc of new cars bought this way.
Indeed, so popular are they that many car manufacturers even have their own banks to lend the cash. Others hook up with Irish banks to sell them at much lower interest rates than the ordinary punter can get.
Take Nissan for instance. It uses AIB to underwrite its PCP loans to customers. The interest rate on a new 'Note' family car is just 4pc per annum. But if a customer asks AIB directly for a personal loan, they'll pay more than double that, 8.95pc at a minimum.
Renault has its own bank, offering just 3pc per annum interest and it has even been offering interest-free loans on certain models.
Pat Kirley of Gowan Motors says around 30pc of his sales are via PCPP: "We were late to the game, but it's up year on year." With Opel, Peugeot and Kia among his marques, Kirley says PCPs are "a great system". "There are advantages for everyone. You find that people come in after three years is up and want to upgrade. Once you give them all the information and they clearly understand how it works, it's great. Also, they are not tied to the same garage when the contract is up. They can take the car and get a good price anywhere and a new PCP - many people do that."
So is there a catch? Well, let's look under the bonnet of PCPs and see if they're all they're cracked up to be.
How do they work?
PCPs share the trait of an up-front deposit (usually 10pc-50pc), low payments for two to five years and possibly a 'balloon' or final payment at the end when you will get the option to (a) hand back the keys, (b) pay the final premium or (c) roll the lot over into a new loan and car.
Underwriting is minimal and usually quick. PCPs set out a Guaranteed Minimum Future Value (GMFV), the expected value of the car when the loan term is up (and the final payment you need to make to own it). This is a win-win for the garage, since you can't influence it and it means the car is always worth more than the loan to them.
Here's an example
A Toyota Avensis Luna 1.8 retails for €29,495. The PCP allows you to choose your deposit, say 30pc, or €6,000, financed through Bank of Ireland Finance at an interest rate of 5.5pc per annum.
The loan is €23,495 including admin costs. The pre-calculated GMFV is €10,618, with monthly repayments of €440.48 for 36 months.
What can go wrong?
The car is leased. It isn't yours until the day that final payment is made. If you miss repayments because you lose your job, for instance, the car will be repossessed, leaving you with neither job nor wheels. If you have paid less than one-third of the purchase price, the car finance company can take back your car without taking legal action against you and you still owe the balance. When the term is up, the GMFV may not be enough to act as the 'deposit' on a rolled over new loan, so you might have to top it up.
Why is the interest rate so low?
PCP loans are 'asset secured' - the garage can't lose as long as you don't decrease the car's value too much. This is why restrictions are imposed on the mileage you can do, to around 15,000-20,000kms per year. You also have to maintain and service it properly.
How is it different from hire purchase (HP)?
HP generally doesn't have a balloon payment. It is effectively a straight-forward loan, allowing you to own the car at the end of the term, but the repayments will be higher as a result, as will the interest rate charged. These days, HP is usually reserved for commercial customers where the GMFV doesn't need to be preserved.
What's the alternative?
A personal loan from a bank or credit union. While you'll pay higher interest, this is because it is an 'unsecured loan'. While the lender will certainly chase you for repayments if you miss them, they can't unilaterally swipe the car from your driveway and sell it off.
Are there any other fees?
Yes, usually there are 'documentation fees' or some such administrative charge, amounting to around €150.
Any other small print?
Yes. There is a clause in PCP contracts called the 'half rule'. It will be buried somewhere in the paperwork because it benefits the customer. The 'half rule' allows you to end a PCP agreement at any time and return your car, but you have to pay half the purchase price (which includes the interest due).
If you have not yet paid half the purchase price, you can still return the car but you will owe the difference between the repayments you have made and half the purchase price.
If you find yourself in financial difficulty, returning the car using the 'half rule' may be a good option for you because the finance company may decide to repossess the car if repayments are not met. Customers should not sign a 'Voluntary Surrender Form' which is the common approach, and would allow the garage to summarily take the car while you still owe the outstanding debt.