Most car buyers unaware of personal contract plans risks

The majority of motorists who bought their cars on personal contract plans (PCPs) do not understand how they work and could be left with nothing to show for it, despite paying a deposit and making monthly repayments.

At the end of last year, the Central Bank valued the PCP market at €1.5bn, with 126,249 contracts outstanding.

However, a consumer study of PCPs, used to finance approximately a third of new car purchases in Ireland, found that, despite involving large sums of money relative to household budgets, the products appear poorly understood.

The main difference between a PCP and a personal loan is that with a personal loan you borrow the money, pay for your car, and own it immediately.

With a PCP, the consumer does not own the car until he or she has made the final payment.

The Competition and Consumer Protection Commission (CCPC), which contributed to the cost of the research, said further protections were needed for customers against a backdrop of the growing PCP market.

The watchdog said the complexity of PCPs meant it was likely consumers did not fully understand how they worked, “particularly the implications at the end of the agreement”.

This is where the buyer pays a final ‘balloon’ payment before becoming owner of the car. The amount is set in the original contract, referred to as the guaranteed minimum future value (GMFV). If the customer can pay off the GMFV, the car is theirs.

Alternatively, if the car is in positive equity — which is difficult to predict at the time of purchase — and if the customer has adhered to the terms and conditions of their contract, governing mileage and wear and tear, they can rollover to a new PCP.

Otherwise, they may have nothing to put towards the cost of a new car.

If the car buyer is unable to make the final payment, the car goes back to the lender.

The Central Bank has warned that customers may need to borrow again to make the final payment. A further disadvantage is that they cannot sell the car without the lender’s permission to finance a new car or for personal reasons.

Prof Lunn, associate research professor at the Economic and Social Research Institute (ESRI) and one of the authors of Do Consumers Understand PCP Car Finance?, published yesterday, said it was “worrying if people in situations of temptation don’t fully understand what is in front of them”.

He added: “We have identified that there is a problem and when problems with a financial product arise, it is not untypical for the regulator to call for greater protection and greater clarity for consumers.

The researchers said such was the “scale of miscomprehension” around PCPs that it may be necessary to make it mandatory for car dealerships to make more “effective disclosures” about what the deal actually means at the point of sale.

The CCPC said it believed that “before significant issues emerge, policymakers should consider the market and assess what actions could help safeguard consumers into the future”.

The CCPC has made a number of recommendations for policymakers including that the growth in the PCP finance market “should be considered in the context of potential future risk”.

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