Sunday 15 September 2019

Your Money: A crash course in new car finance

Personal Contract Plans are appealing - but know your obligations first

Growing market: Average car loans are estimated at €23,000
Growing market: Average car loans are estimated at €23,000
Sinead Ryan

Sinead Ryan

Personal Contract Plans, (PCPs) are "complex financial products" and poorly understood, according to new research from the ESRI. The think-tank asked consumers if they knew how the car finance plans operated, and discovered, shockingly, that 23/100 respondents' answers, were "no better than chance".

When you consider that €1.5bn is owed in PCP finance to garages funded by banks, or that more than one in every three new cars are sold on this type of hire purchase arrangement with over 126,000 leases in operation, it's worrying that buyers know very little about how they work, or indeed, the pitfalls when something goes wrong. The Central Bank, which doesn't compel car companies to report PCP sales, estimates that average loan deals are €23,000; it's the biggest area of credit growth outside of mortgages, so you'd imagine we'd be more concerned than we are.

It's a global issue: over £60bn is loaned in car finance in the UK and an eye-watering $1.2trn in the States. These more developed markets have recently seen loan books flogged to vulture funds to tackle arrears so it would be stupid of us not to take notice.

Here, there is no evidence, yet, of financial trouble, although cars can, and do, get repossessed. Bank of Ireland, AIB and the marques' own banks offer most of the loans; Volkswagen alone manages €157bn of its own car debt globally.

The elements of a PCP plan are three-fold:

1: There is an upfront payment or deposit required, anything from 10pc - 50pc. Clearly the higher the deposit, the lower the monthly payments.

2: Repayments are usually financed over three years, at very low or even zero interest rates (see table for some current offers). This is attractive to consumers but the reason they are so competitive compared to personal or credit union loans is that the asset never changes hands until the final day; unlike with a regular bank loan, the car is not yours.

3: A final, or balloon, payment (up to 30pc of the price) is made after three years. The ESRI study showed that "few people" realised the impact of this and is probably the reason that instead of paying it, most customers opt to 'roll-over' the loan to start all over again.

Garages offer a Guaranteed Minimum Future Value (GMFV) on all cars. This is the figure it determines the car will be valued at at the end of the term (and is usually the amount of the balloon payment).

This gives certainty to the contract, which is good, but with so many UK imports flooding the Irish market now, it's dubious whether this figure can continue to be honoured in future PCP plans.

All PCP plans have in-built restrictions on mileage, so you'll be limited to 15,000 or 20,000km per year along with no-damage policies and servicing requirements.

Half Rule

If you get into financial trouble and your PCP goes into arrears the bank is entitled to take back the car. They may try to enforce a 'voluntary surrender agreement' which ties the customer into returning the car but still retaining the debt.

However, under the Consumer Credit Act 1995, you have the right to end a PCP agreement, return the car and owe nothing further if you have already paid more than half of the total bill (ie, the car's value + interest due).

Even if you haven't paid half, you can do so and end the agreement. This protects consumers.

The Competition and Consumer Protection Commission has an excellent website on PCPs which the ESRI's research found aided its testers. www.ccpc.ie

Irish Independent

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