Sinead Ryan and Char­lie We­ston’s weekly guide to man­ag­ing your money

Per­sonal Con­tract Plans are ap­peal­ing – but know your obli­ga­tions first

Irish Independent - - Business - 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:

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.

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

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