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Cork Independent


PCP problems could see return to credit unions

Wednesday, 15th November, 2017 5:50pm

Personal contract loans, or PCPs, are a relatively new concept in Ireland which allow people to purchase cars at a relatively more affordable monthly cost than a straight car loan or hire purchase.

Rates over the last three years have varied from zero to three per cent which has made new cars more attractive to motorists. A PCP differs from a traditional hire purchase agreement in that you have lower monthly instalments that only cover the car’s depreciation, and then a very large final payment at the end.

When you signed on the dotted line several years ago, the end of your PCP finance contract might have seemed like a lifetime away. However, a lot of these contracts are coming to maturity around now, and it may be time to consider your options again – as you don’t automatically own it.

With a PCP you have three choices when the contract ends: make the optional final payment to buy the car, return the keys and walk away with nothing left to pay – provided the car is in good condition and below the pre-agreed mileage limit – or hand it back and get a new one.

One question you may need to ask when your contract matures is what the second hand car market is like. Although you will receive a guaranteed minimum value (GMV) for your car, what happens about a deposit for the next car? Does the trade in value include enough to pay off the final payment and the deposit on your new car? The GMV of your car is also based in the condition of the car and whether the mileage has exceeded the contracted mileage.

It remains to be seen whether motor dealers will see an appetite from car buyers for the large number of cars returned under PCP contracts and whether that will effect the value over the GMV at which they will take them in at. Will it also mean that the PCP customers will need to borrow for a deposit on their next car or indeed to pay off the GMV if it is necessary to hold on to your car?

Regulators have been watching the rise of these forms of finance and here the State's Competition and Consumer Protection Commission is launching a study into the impact of PCPs on consumers and the motor industry. Some commentators have been warning that the explosion in popularity of PCPs is potentially dangerous.

There is a danger that people are taking on debts they cannot afford and high levels of imports could collapse car values. With the fall in value of the pound, car imports have sky rocketed, thus putting more pressure on the GMVs being offered by dealerships.

Credit unions have been the losers with the introduction of PCPs and may see motorists return to the safety of community-based lenders as the perfect storm of high UK imports and an influx of cars from PCP customers.

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