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To PCP, or not to PCP, that is the question...


Sinead Ryan has the best advice on car finance.

Sinead Ryan has the best advice on car finance.

Sinead Ryan has the best advice on car finance.

If we needed further proof that we've 'turned a corner', to use political parlance, then it seems we're turning it in a shiny new car. 64,716 were registered in the first quarter and sales continue strong, up 30pc on 2014.

A return of consumer confidence, or clapped-out old bangers needing scrapping? Either way, choosing a 2015 plate over a three- or four-year-old one is easier with the attractive finance options available from garages. Where your bank or credit union will charge you anything from 7-14pc for a loan, pop down to your local forecourt and you could pick one up for free. Interest-free, that is.

The catch, of course, is in the ownership. Whether you go Hire Purchase (HP) or by Personal Contract Plan (PCP), you don't own it until the very last payment. With a traditional loan, you will of course be chased for missing payments, but the bank can't physically take the car off you.

That said, PCPs and HPs should be approached with caution. If you need one at all, perhaps you should check out the second-hand car lot out back. But there's no denying we like the smell of the leather, the zero kilometres on the clock and getting to choose the colour.

Here's the science bit: HP is a lease facility over a set number of years and you own the car at the end. The payments are usually spaced out evenly, less any deposit you pay up front.

A PCP is slightly different. Payments are usually lower, the term shorter and the deposit heftier. At the end you have the option, as Opel puts it, to "Take it, Leave it or Change it". That means, 'buy' the car via a balloon payment at the end of the term (usually two to three years), hand it back owing nothing (including the car), or roll over the arrangement to another model and start again.

The method by which this is all possible is called the 'Guaranteed Minimum Future Value' (GMFV), a figure decided by the lender, which ensures it doesn't lose out on the deal. If you keep the mileage within certain parameters and the car in good nick, it works out fairly well for both sides, especially if you're paying no or low interest rates (see table, above right).

In the UK, up to 80pc of cars are sold via PCP and the Irish market by comparison, is immature. But that's changing with most garages now employing finance advisers just to deal with the loan paperwork and get the deal signed off. Getting a PCP will prove much easier than a bank loan as the risk bar isn't so high.

The car always belongs to the bank and you've put up a hefty down-payment, so getting credit is generally straight-forward. The loan is with the bank, not the garage, and in the Irish market, Bank of Ireland Finance is the leading provider.

Renault, through its French leasing arm, has loaned over €200m in car finance since 2010 while six out of every ten Volkswagens purchased are via PCP with their in-house lender. In addition, buyers are usually asked to stump up 'arrangement fees' before they take possession - typically anything from €50 to €150.

But what if something goes wrong? You lose your job; you get sick; you miss your repayments. In a normal banking arrangement, you're hassled for a bit and then a deal is struck. It's an unsecured loan after all, and that's why you paid the penalty of the higher interest rate.

With PCPs, not so. The lender is permitted to recover its property (the car) almost immediately, and it will. If they get you to sign a Voluntary Surrender form, you're also liable for the remainder of the debt, and you have no wheels.

However, under S. 63 of the Consumer Credit Act 1995, the 'Half Rule' clause allows you to terminate the agreement and return the vehicle owing nothing further, if more than half the repayments (including interest) have been made on the car.

Irish Independent