The five things you need to know getting a car on a PCP
Depreciation, depreciation, depreciation… why these contract deals look good but might be costly
One in three new-car buyers opt for a Personal Contract Plan finance deal. Yet how many people fully understand them? And why are there so many warnings about PCPs? Only recently, we had yet another one from the Central Bank, which followed hot on the heels of a similar report about PCPs from the Economic and Social Research Institute and the Competition and Consumer Protection Commission.
This time the Central Bank reiterated its concerns about this complicated form of finance, which involves paying for not much more than the depreciation in a car over three years – followed by a balloon payment if you want to own it.
This means a large number of people are practically renting their cars instead of owning them.
And didn’t this type of ‘buy now, pay later’ mentality get us all into trouble before?
In March, the Central Bank had also warned about ‘increased indebtedness’ of consumers with 76,582 people tied up in PCP deals.
In the first six months of this year, €347m worth of PCP deals were done, ballooning this segment of the car finance market up to €1.4bn.
A separate CCPC report issued in March showed that PCPs are now used in about one third of new car purchases.
Yet most people fail to understand them fully.
Why are so many economic heavy hitters now bringing their sights to bear on PCPs? Are they trying to tell us something?
And are PCPs dangerous to our economic health, individually and as a nation?
If there is another financial crash, it’ll be very much worse if a large number of people don’t even own much equity in their cars, never mind their houses. PCPs are more complex than people imagine, with some painful stings in the tail.
‘When rating PCP offers, almost one quarter of the time consumers judged an inferior deal to be better than another that was objectively superior,’ the ESRI said.
‘Consumers may be surprised to discover that after putting down a deposit, making three years of monthly payments, caring for the car and staying within agreed mileage limits, they end up owning little or no asset in return.’
Here are five things you need to know about PCPs: When buying a home, the three key factors are location, location, location. With cars, it’s depreciation, depreciation, depreciation.
If you can get a 0% PCP deal on a car you like, what’s not to like? Well, the same catch that applies when buying a new car with any form of finance – the alarming decline in value. This can be as much as 40% in the first year. You’d be far better off buying a second-hand car aged two to five years, according to the AA. If you exceed certain mileage limits, you will pay penalties, usually around 60c per extra kilometre, depending on the terms of your contract.
For example, if you exceeded your limit by 10,000km, the extra bill would be €600.
Patricia, who did not wish to have her full name published, told us last year how she bought a car in 2014 on a 0% PCP finance deal.
Two years into the contract she was horrified to see a limit of 60,000km on her mileage, after which penalties were to apply.
‘I would never had financed the car if I knew about the mileage limit, my husband was with me and he never heard the salesman refer to mileage.
‘I am both angry and upset as it could mean a €5,000 extra bill,’ she told us then.
We contacted Patricia this week to see how she got on when her PCP contract expired.
She has paid the balloon payment and traded in her car at the end of the contract. The dealer never mentioned the mileage penalty when she did and it’s unclear
DON’T FORGET THE ALARMING LOSS OF VALUE
BEWARE OF MILEAGE LIMITS
YOUR CAR CAN BE REPOSSESSED
HIGHER INTEREST RATES CAN COST YOU OVER €3K
whether it was applied, underlining the confusion that persists around this form of finance.
Either way, she vowed never to buy a car in this way again.
‘I would never recommend PCP to anyone,’ she said.
Patricia is not alone in finding these contracts confusing, as the joint CCPC and ESRI report highlighted that most people do, including this intrepid finance correspondent.
Initially, I thought that if the car is worth more than the Guaranteed Minimum Value, surely no penalties should apply. But apparently this is not the case, as Jeanne McGann, head of marketing and communications at Nissan, explained to me.
‘It’s very important the customer is aware of mileage restrictions and they know what they are getting into. They could be liable. A discussion needs to be had with the dealer.’
‘There is a cost per mile. If they are over it, that is a contractual issue. How any over-mileage is sorted out is between the dealer and purchaser and depends on the terms of the contract,’ she said.
The CCPC also raised concerns about mileage. ‘Mileage was one of the things that could catch you out, so be aware of it. Some dealerships offer the opportunity to renegotiate the mileage. It all depends on the dealership,’ said a CCPC spokesman. ‘People should look carefully at their own contract. There is no standard contract.’
Wear and tear clauses also exist. If you do degrade the upholstery by more than is normal over three years, you could be penalised too. So, as ever, read the small print carefully. If you miss payments and have paid less than a third of the purchase price, the car can be repossessed, even without taking legal action against you. With PCPs, it takes longer to pay off the crucial one third of the price because you are only paying for part of the car’s value. The interest rate on the PCP deal can make a huge difference to the cost of the car. We picked five top car makers currently offering a range of PCP interest rates. Not all cars cost the same. We added extras to make them somewhat similar. Interest rates on PCP finance are all low, ranging from 0% to 5.9%, as they are subsidised by car makers to encourage people to buy new motors.
Skoda is offering 0% finance on the Octavia. The basic model costs less, but we added a few extras to bring the price up to €27,599 for comparison purposes. With no interest charged, you end up paying €27,599 by the end of three years.
That’s around three grand less than you’d pay to finance the purchase of a VW Golf on its 5.9% PCP deal, even allowing for €400 difference in retail price. So it’s worth shopping around for better rates.