Read the terms when it comes to car finance

Financial advice from Grainne McGuinness

Car finance hit the headlines with the news that the Competition and Consumer Protection Commission (CCPC) is undertaking a study into personal contract plans (PCPs). The CCPC said PCPs, increasingly popular with Irish drivers, “are relatively new and complex and we want to examine the experiences of consumers”. Some elements of the study are around regulation of PCPs, both in terms of the companies offering the deals and those selling them in the garage.

But, given their rise in popularity, the CCPC is also concerned with the terms motorists are being offered and how well they are being explained.

Spokeswoman Áine Carroll said: “We want to better gauge customers’ understanding of these products.”

The Society of the Irish Motor Industry (SIMI) has welcomed the review. Deputy director general Brian Cooke said: “I think it is very important for our industry that our customers and regulators are confident in the products we sell, whether they be the cars themselves or the finance attached.”

Explaining PCPs is a topic that has cropped up regularly in recent years. Estimates of what percentage of new cars are financed using them varies from 30% to 70% of the market ,but there are a lot of Irish people currently tied into these deals. So should they be concerned?

Ms Carroll said the CCPC is not saying these deals are necessarily bad but added: “If the coverage this week prompted someone to take out their agreement and read when they never did before, that would be a good thing. Every time we as consumers enter any type of agreements we are met with this wall of paper and it can be so hard to understand what the most important points are.”

The important parts of a PCP arrangement are the deposit/trade-in, the repayments, and the guaranteed minimum future value (GMFV). After you make your scheduled repayments, you then decide to pay the GMFV and buy the car at the end of deal, walk away or roll over into a new deal.

The advantage of PCPs is that motorists can drive new cars with much lower repayments than if they took out a traditional loan. They are popular with consumers for this reason and Mr Cooke believes this is fine once buyers understand the details.

“I think generally speaking they are a good product,” he said. “People should have been sold them on the basis that effectively they are paying for the use of the vehicle and as long as they keep within the terms of the deal in terms of mileage and the upkeep of the vehicle, when it reaches the end of the term they should not have any major concern.

“If there is any significant drop in terms of used car residual values it is actually the dealer or the bank who have to underwrite that. The customer is not underwriting the value of the vehicle.”

This is true insofar as the customer can only be liable for the GMFV once they keep to the terms. But Ms Carroll says that if second-hand prices drop, customers who hoped to have equity to use as deposit for a new deal could be disappointed.

The CCPC is keen to investigate if terms are being made clear. There is no question these deals come with a number of important conditions. There will be an agreed maximum mileage as part of the deal which if exceeded could affect the GMFV. For this reason they are best suited to people who can be very sure about the amount of driving they will do during the lifetime of the loan.

Motorists will also generally be required to service the car at a main dealer and will not be permitted to modify the vehicle. With set repayments and GMFV, they are also somewhat inflexible financially, perfectly fine once your income is stable, but potentially a problem if the unexpected happens.

Asked if he saw any danger of the study being the end of PCPs, Mr Cooke said: “No, I don’t think so. I would anticipate there will be increased oversight and I don’t think that’s necessarily a bad thing.”

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