Watchdog warns on ‘confusion’ as drivers opt for bad loan deals
‘If you need a PCP plan then you can’t afford a new car’
CAR buyers simply don’t understand key aspects of how controversial Personal Contract Purchase (PCP) plans work – and often confuse bad value deals with good ones, a new report has warned.
PCPs were used to purchase more than 36,000 cars last year and now account for around a quarter of all new car deals.
A report released yesterday by the Competition and Consumer Protection Commission and the ESRI warned: ‘While PCP deals have become a popular form of car finance in Ireland, many consumers’ grasp of these products is poor.’
The report said: ‘Car buyers who take out PCP finance may be surprised to discover that after putting down a deposit, making three years of monthly payments, caring for the vehicle and staying within agreed mileage limits, they end up owning little or no asset.’
The report also warns that a collapse in future second-hand car prices could badly affect the motor trade.
‘Consumers are at risk, too – if second-hand values fall, their car will cover the final cost of the loan, but there may be nothing left in its value to act as a deposit for a new car if they chose to rollover. Worse, they may have to pay a final loan amount that will be more than the effective value of the car,’ it says.
PCPs are a type of hire purchase in which the purchaser pays a deposit of between 10% and 30% and makes regular monthly payments for a number of years before
PCPs ‘largest source of car finance’
being required to pay a last, significant balloon payment to own the car outright.
Alternatively, they can hand the car back or pay a new deposit and begin another contract. The finance plans look cheap on the forecourt as they show the amount a new car buyer has to pay each month, but can leave someone with a hefty bill when the deal comes to an end.
PCP plans usually have lower monthly payments than hire-purchase agreements or loans, increasing affordability. But they also have more complex financial arrangements and conditions, the report stated.
‘For the motor trade, car dealers enjoy the increased sales that come with more affordable credit, receive bonuses from financial houses for encouraging people to take out loans, and further benefit from customers returning to rollover their PCP into a new agreement for a new car.
‘Renewal rates for PCP buyers are running as high as 60%, depending on the brand in question,’ the report added.
Between 2012 and 2017, the value of the deals grew more than tenfold, from being worth €146million a year to €1.5billion. And the number of contracts ballooned almost six-fold from 6,167 in 2012 to 36,087 in 2017, and were used in almost one in four of the 131,356 car sales that year.
On average, 35,000 PCPs are taken out every year now, but the market remains unregulated.
Report co-author Terry McElvaney, who led the ESRI study, said: ‘Given that buying a car is the second-biggest financial transaction most people undertake, it is vital that consumers entering these deals know what they consist of and what they are getting into.’
The deals were described as ‘not for everybody’ by Alan Nolan, director general of the Society of the Irish Motor Industry, which represents car dealerships.
‘Provided the offer is good, that the package that is put together is conservative in the future value it puts on the car, and it has to be because, from the industry’s point of view, the success is if the customer is happy, that the customer gets a good deal and the customer will stay with that dealer and with that brand into the future and that’s only possible if they do a really good deal on it.’
He said SIMI ‘would welcome’ a code of practice on how the deals are sold to buyers.
The report gave a sample of people information about PCPs typically given to car buyers and then tested to see if they could judge the offers accurately and if they understood the key features. The findings ‘raise concerns’ about consumer protection, it said.
‘The participants found it harder to choose consistently between PCP deals than hire purchase deals. When rating adverts, they often rated inferior PCP deals to be better value than superior ones.
‘The tests demonstrated a clear lack of understanding. Almost one quarter of the consumers performed no better than chance on multiple-choice questions that tested whether they had absorbed the central facts about how PCPs work. Of particular concern is consumers’ understanding of what happens at the end of the deal.’
Finance expert Brendan Burgess, of Ask About Money, said: ‘PCPs are little bit unusual, if you don’t need one, they’re great value. If you’ve got loads of money and you want to buy a car you can pay for it over three or four years, and at the end of that you’ll buy the residual with cash you have.
‘If you need a PCP it means that you can’t afford to buy a new car – but when you’re 24 or 25 people just want a new car.’
And Consumers’ Association of Ireland chief Dermott Jewell added: ‘PCPs are popular, but there’s no question that something more needs to be done to guarantee that consumers better understand the detail.
‘It’s a complicated issue and it’s been oversimplified, so tread carefully.’
A recent Central Bank report found PCPs are the main growth in non-mortgage lending by Irish banks, and have become the largest source of car finance in the Irish market since April 2016.
It also found loans from ‘nonbanks’ account for one-in-nine outstanding PCP loans. christian.mccashin@dailymail.ie