Sinead Ryan: Wheels are in danger of coming off the PCP finance bandwagon

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Sinead Ryan: Wheels are in danger of coming off the PCP finance bandwagon


Some marques are reporting huge increases in PCP deals. (Stock picture)
Some marques are reporting huge increases in PCP deals. (Stock picture)

It sounds like the ideal way to finance new wheels – a reasonable deposit or trade-in, low repayments for a few years and swap the car for a brand new model at the end before starting all over again.

It’s the premise of PCP – Personal Contract Plans – which are unregulated and unreported.

Easy loans, given out with minimum underwriting by garages eager to flog new cars to happy customers. It seems like a win-win.

They’re certainly popular, with up to one in three cars sold by PCP, and that’s a guesstimate, since unlike other countries there’s no central registry of these loans.

However, new research commissioned by the Central Bank has found that the business model for PCP finance, motoring along successfully to date, may blow a gasket in the years to come.

Bubble

Terms such as “negative equity”, “credit bubble”, “sub-prime” and “churning” are floated in the report. Where have we heard those before?

First, the number.

In Ireland, it’s estimated that €1.5bn is outstanding in car finance. One in three cars are sold by PCP, and in six years the number of new cars under these plans has risen from 14,000 to more than 126,000.

Chances are, if your neighbour has a shiny new 182 in the driveway and their boss didn’t buy it for them, PCP is the reason.

However, we’re still in the penny ha’penny place. In the UK, where regulators are becoming seriously concerned, £60bn (€67bn) is loaned via PCP and up to 80pc of all new cars are under these contracts.

In the United States, where the concept was invented, it’s an eye-watering $1.2trn.

Arrears have been massive, and companies have been flogging the debt off to vulture funds for collection.

If you’re spotting an analogy to the housing market, you’re not wrong.

Read more: PCP may be a worthwhile finance option – but be mindful of the hidden dangers

The key findings of the Central Bank research were that 35,000 PCPs are taken out here every year at an average value of €23,000, up from €15,000. It’s the biggest growth area of non-mortgage credit, accounting for 43pc of all auto debt.

Bank of Ireland Finance sells PCP on behalf of Ford, Toyota, Opel, Hyundai and Kia; AIB sells for Nissan, and Renault and Volkswagen use their own in-country banks.

Bank of Ireland says its PCP book is prudent and with low arrears, and there’s no suggestion otherwise.

Ireland is a market minnow, and to give you an idea of the scale, Volkswagen alone manages €157bn of its own car debt globally. However, challenges are coming, and we would be foolish not to consider the impact in other markets.

This is an enormous challenge for PCP finance. At present, if you buy a car, there’s an upfront deposit (usually 30pc), three years of repayments and a balloon payment (another 30pc) at the end. This final amount is guaranteed, so there are no surprises for bank or motorist.

However, the customer merely services the depreciation and leases the car until the balloon payment is made on the last day (in reality, the vast majority don’t pay the balloon, but simply refinance a new car).

However, a flood of UK imports has depressed the second-hand car market since 2016.

The Central Bank report says: “Negative equity may be of particular concern in the Irish market, given the post-Brexit fall in the value of sterling which has seen an increase in cheaper used car imports, potentially reducing the prices of used cars in the future and pushing existing PCP contracts towards negative equity.”

Incentives

It also questioned the incentives offered to consumers by dealerships and banks, and the “appropriateness” of credit checks on affordability before lending, which may be less rigorous than for a normal personal loan.

PCPs don’t fall under the Central Bank’s Consumer Protection Code either, relying on lenders themselves to police the market.

The Guaranteed Minimum Future Value (GMFV) is the figure, set at the outset, which the garage promises the car will be worth after three years.

However, the depressed second- hand market emerging over the next two or three years may result in GMFVs not being as high, meaning future initial deposits and balloon payments will be higher.

In addition, the GMFV you were promised at the start may now not be enough to act as a deposit on your next car.

A PCP is a convenient, low (or zero) interest arrangement, but it’s essential to look before you drive.

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