Saturday 20 January 2018

Are PCPs the best way of driving down cost of your next new car?

Sinead Ryan

Sinead Ryan

Up to 70pc of new cars are bought with personal contract plans (PCPs), offering ultra-low (or zero) interest rates and the promise of another new car after three years.

While there is nothing wrong with PCPs, they remain an anomaly in the financial world because of the way they are designed.

Although financed by banks (Bank of Ireland Finance is the main lender) or by the maker's own finance house, they are sold by the car salesman, a non-professional intermediary.

That means PCPs are not regulated as a financial product by the Central Bank (although the banks that finance them are).

Nor will you get all the checks and balances that you might when buying insurance or a personal loan from your credit union or bank (they can only be sold by registered, qualified salesmen).

This does not make PCPs a bad product but it does mean buyers could unwittingly sign up for a product without fully understanding the loan or without an overall financial check to see if they can afford it.

Either way, the lender wins. Because the car remains its property, little underwriting of the loan needs to take place.

There are added issues coming down the line. With 172-plate cars arriving later this month, a new report soon to be published by the Society of the Irish Motor Industry (SIMI) is likely to show that Brexit and the car credit market may have consequences for motorists.

In the US and the UK, where PCPs have been around for a lot longer, problems have arisen with financing, leading to fears of a credit bubble, not unlike the one in the mortgage market.

A lot of the lending for car finance has been passed along to sub-prime lenders who report increases in repossessions and looming defaults.

If you think it cannot be that big a problem, you would be wrong.

The PCP market in Britain is worth £45.5bn, but there are no figures for Ireland because the Central Bank does not require them to be reported.

Brexit has already resulted in a flood of second-hand cars to the Irish market as sterling weakens.

When the current swathe of PCP models come back to garage forecourts in the next few years, there is likely to be a drop in price and the built-in "guaranteed" value may suddenly be anything but "guaranteed".

This can cause problems for both the garage and the customer.

Here's how PCPs work: ● You trade-in or pay an up-front deposit of up to 50pc (usually 10- 30pc) of the price of the new car. ● The balance is financed over three years at very low interest rates. ● At the end of the term you have three options: a) Give the car back. b) Pay the "balloon" payment at the end (up to 30pc of the car's value). c) Re-finance for a brand new model. ● You will not own the car until the final payment is made. Because most people re-finance, this means they never own the car. ● Built in to the contract is a "guaranteed minimum future value" (GMFV). This is the amount the garage believes the car will be worth after the three-year contract is up. However, the GMFV comes with conditions.

The difference between a PCP, and a personal car loan is that with a personal loan you become the owner of the car the moment you sign on the dotted line.

Of course, the lender will chase you if you do not make the monthly payments but they cannot take the car off you.

This is why "unsecured" loans carry higher interest rates.


Additionally, when you sign a PCP, you are bound by strict rules about the maximum mileage (usually no more than 15,000km a year) and wear and tear (you will not get the full GMFV if the garage deems the car to be in poor condition).

The GMFV will also be affected if you have been involved in an accident and the repair of the car was significant.

There are lots of offers out there (see table), many with added gimmicks such as free servicing, cash-back and scrappage deals.

Garages are desperate to get rid of "new" 171-plate cars, so if you're in the market, there is a definite bargain to be had.

However, never forget you are signing a legal contract, so read all of the small print before you sign.

If you can't afford it, go second hand.

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