Many car buyers purchasing vehicles using personal contract plans (PCPs) do not understand how they work and may be at financial risk, according to a report.
PCPs involve the payment of an initial deposit, followed by a series of low monthly repayments and then a large final payment at the end.
The review, conducted by the Competition and Consumer Protection Commission (CCPC), shows that in 2016 the value of the credit extended to consumers via PCP agreements was approximately €800m — an increase of 65% from the previous year and accounting for just under 33,000 cars. The average PCP contract value in 2016 was just under €25,000.
There are indications that the number of PCP agreements were slightly lower last year due to the reduction in new car sales in 2017, but the report also shows that, in 2016, 12% of PCPs were used to buy second-hand cars and that the number of PCPs issued for second-hand cars in 2016 was more than double that of the previous year.
As for those who used PCPs, the report said that “those who have used this type of finance reported positive experiences” and defaults and arrears levels are very low.
“Based on the research overall, however, the CCPC is of the view that, because of the considerable complexity inherent in PCPs, there must be a doubt as to whether consumers can fully understand how they work, particularly the implications at the end of the agreement,” said the report.
“For example, in focus groups commissioned by the CCPC, most consumers believed that their car’s value would exceed the amount that they owed at the end of the term and that therefore they would have equity to use as a new deposit. However, this may not be the case should market values decrease.”
Under PCPs a large proportion of the cost is deferred to the end of the agreement. Under the current regulatory framework, those arranging PCP products are not required to check the affordability or suitability of the consumer before selling them a PCP product.
Among the report’s recommendations is that PCPs be brought within the scope of the Central Bank’s Consumer Protection Code to mirror the protections of other similar financial products.
The report also says an interim action would be for the Central Bank to instruct regulated entities underwriting PCPs to only do so where the credit intermediary can demonstrate that it has conducted standardised affordability checks.
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