By Pádraig Hoare
Banks are exposed to the €1.5bn personal contract plan (PCP) car market if prices in the second-hand market were to dive further, the Central Bank has warned.
Almost one-third of new car sales are now financed by PCP, a report from three economists said.
Their study found that a further risk could include car owners falling into negative equity.
The watchdog’s Martina Sherman, Tiernan Heffernan, and Bryan Cullen found that at the end of 2017, there were 126,249 PCP agreements worth €1.5bn — that is up from around 14,000 six years ago.
PCP is a form of hire purchase where the consumer typically pays a deposit up to 30% and makes regular monthly payments, usually for three years, before being presented with options such as handing the car back to the dealer, paying off a last so-called balloon payment to own the car outright, or paying a new deposit and beginning another contract.
Although popular in Europe and the US, concerns have been expressed by consumer advocates that motorists may not fully understand the agreement to which they sign up.
The Central Bank economists said there was now an average of 35,000 PCPs every year, compared to 6,000 in 2012, while the average value of contracts rose from around €15,000 to over €23,000.
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, the report said — potentially reducing the prices of used cars in the future and pushing existing PCP contracts towards negative equity.
The banking system’s exposure to the car finance market in general, should a shock to the second-hand car market occur, needed further study, according to the authors.
The Central Bank said it would not divulge the market share of lenders because it was commercially sensitive information.
Bank of Ireland has been the biggest provider of finance for PCPs in the Republic, with major brands such as Ford, Toyota, Opel, Hyundai and Kia all using the bank.
The bank said it was the “market leader” of car finance, insisting its PCP book is “prudently” managed with very low arrears.
The Central Bank report said risks from entering PCP agreements warranted further probing, including the incentives dealerships and banks offer consumers in an effort to retain and ensure repeat business.
It said increased indebtedness also needed examining, as many consumers were now taking out a term loan to finance the final instalment of the PCP, thereby pushing up the overall cost of credit.
“The Irish PCP market is in its early years and some of the above concerns will not yet be examinable,” the report said.
The Competition and Consumer Protection Commission (CCPC) earlier this month recommended PCP agreements fall within the Central Bank’s Consumer Protection Code to give similar protection of other financial products.
It said the Central Bank should order regulated lenders underwriting PCPs to only do so where the dealers conducted affordability checks and communicated information clearly to the consumer.
Although major problems had not yet arisen since PCPs had picked up in popularity, the potential for a drop in second-hand car prices as well as the complexity of some agreements could cause “significant” harm to consumers, the CCPC said.