KNOW HOW PCP WORKS

Let’s say you want to buy a Skoda Octavia, for which 0% finance deals are now available. The car costs €27,599. You pay a deposit, say 10%, or €2,760. You then pay €402.50 a month for three years, a total of €14,490.

But unlike a loan or a hire purchase deal, you don’t own the car. Fair enough – you’ve only paid €17,250. That’s the appeal of PCP finance: you get to buy a car you can’t otherwise afford.

But that’s a double-edged sword about which our financial authorities are concerned – PCP is luring people into overextending themselves on credit.

There’s still a balloon payment at the end known as the Guaranteed Minimum Future Value.

This is basically the rest of the cost of the car – €10,349 in the case of the Skoda. Yet, currently, three-year-old Octavias sell for €15,000 to €23,000.

On that basis, you should have acquired some equity in the car, which you can use in any trade-in or sale.

But if the bottom falls out of the car market, the dealer guarantees that the car is worth €10,349 and you can walk away.