Making Cents: Consumer guide to entering PcP car loan contracts

Next Monday is July 1, meaning the start of 192 car registrations. 

The motor industry is expecting a flurry of sales activity and in many cases, the new vehicles will be purchased with credit rather than cash.

There are various options when it comes to financing your new car, with banks and your local credit union all keen to offer options. 

But the option that has exploded in popularity in recent years is Personal Contract Plans (PCPs), which are attractive to borrowers as they usually have low monthly repayments.

As these are more complex agreements than your standard car loan, the Competition and Consumer Protection Commission (CCPC) has launched a consumer campaign to ensure motorists understand what they are signing up for.

“A third of new cars are bought using PCP with the average value of a contract being €25,000, which means they are a very popular finance option,” a CCPC spokesperson said. 

“PCPs are new products and extremely complex, so they can be difficult to understand.” So what do you need to be aware of when comparing PCPs to other options?

The important thing to understand is that there are a number of elements to them — it is not a case of simply making set repayments until you have cleared the debt, as you would with a standard personal loan. 

PCPs are similar to a Hire Purchase (HP) agreement and they are made up of three parts. 

These are the deposit, the monthly repayments and the final lump-sum payment called the Guaranteed Minimum Future Value (GMFV).

As mentioned, PCPs monthly repayments are lower than a standard loan because at the end of the term of the agreement, normally three years, you will not have fully paid for the vehicle. 

Instead there is the GMFV, the final payment. So at the end of the three-year period, having had the car and been making repayments, you have three options. 

You can pay the GMFV and own the car, hand back the keys and walk away or enter a new PCP agreement for another car.

Obviously, the clear issue with the second option is that you will be left with no car and will be starting from scratch. 

If you’re plan is to keep the car you are buying for more than three years, then you need to consider how you will pay the GMFV when the agreement is finished. 

If you don’t have it or can’t save it between now and then, you will have to take out a personal loan to clear the balance. 

You will have to work out which would be the better option for you in these circumstances - take out the PCP and then deal with the GMFV or take out a standard car loan with set repayments until it is paid off.

PCPs are probably best suited to those car-buyers who change their car regularly, and will probably go for the first option above, entering a new PCP agreement for another car.

Making Cents: Consumer guide to entering PcP car loan contracts

The CCPC highlights certain conditions it wants borrowers to be aware of. 

“There are conditions attached, some of which may impact on how you use the car and how much you will need to pay at the end of the agreement,” they say. 

“For example, there are typically mileage restrictions, wear and tear conditions and crash damage conditions that can affect the amount of equity in the car at the end of the agreement if you don’t stick to them.

“At the end of the agreement, there might be a difference between the GMFV and the market value of the car, giving you some equity in the car. 

"For example, your GMFV might be €10,000, but the car is actually worth €12,000, giving you equity of €2,000. 

"But depending on the market value and condition of the car, you may have no equity at all. This is important if you intend to use any equity you have in the car as a deposit for your next PCP. 

"If you are planning on trading the car in at the end of the agreement, you need to think about how you would come up with a deposit for your next PCP.” 

As with any other agreement, it is important to know exactly what you are committing to before signing — ask questions at the dealership and talk through the different scenarios. 

For more information go to www.ccpc.ie.

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Making Cents: Consumer guide to entering PcP car loan contracts

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If there are any consumer issues that you’d like Gráinne to address or if you have problems that Gráinne could help with, she can be contacted at makingcents@examiner.ie

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