Consumer watchdog investigates PCP car finance market

News that the State’s consumer watchdog is to examine the personal contract plan (PCP) car finance market has focused attention on what is a little understood financial product.

The Competition and Consumer Protection Commission (CCPC) has said it will examine experiences of consumers in this market and assess the information provided to them at the point of sale.

It will also analyse consumers’ understanding of PCPs, including the structure of the product and the options available to them at the end of the agreement.

The findings of the study will determine the suitability of the current consumer protection regime and help inform any future policy decisions.

It is estimated that thousands of people are availing of PCP contracts, anxious to own their own car at what appear to be favourable terms.

So what are PCPs and are they the magic formula for cash-strapped consumers?

In simple terms, they are a form of hire purchase but with some differences.

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.

When a consumer signs a PCP, they agree to a number of conditions including, in some cases, restrictions on the mileage you can clock up in a year.

According to the CCPC, the arrangement is broken into three distinct parts:

1. The deposit

The deposit usually ranges between 15% and 30% of the value of the vehicle. The deposit can be paid in cash or you can trade the value of a car you already own to use to cover part or all of the deposit.

2. Monthly repayments

The terms of a PCP are usually for between three to five years. What makes a PCP stand out from a consumer perspective is that they generally have low monthly repayments. This makes them seem much more affordable than other types of financial products.

However, the repayments are fixed and, ordinarily, you cannot increase your repayments. If you want to extend the term of repayment, you may also be charged a fee.

3. Guaranteed minimum future value (GMFV)

This third part of the contract is what consumers need to be most aware of. The GMFV is a large, final payment which amounts to what the consumer needs to make at the end of the contract in order to own the car.

This figure is set at the start of the contract and is calculated taking into account a range of factors including the type of car, the length of the PCP contract, and the annual mileage on the car. It amounts to what the company offering the PCP believe is the future value of the car.

When the consumer reaches the end of the contract, there are a number of options open to them:

a) Pay the GMFV

Once the customer does this, they will finally own the car outright.

b) Hand the car back

You can also hand the keys back and walk away. However, you may have to pay the dealer penalty fees if you did not adhere to all of the conditions set out in the PCPO contract signed on day one. Excessive mileage and excessive wear and tear on the car could lead to a penalty. Obviously, you will also have no car.

c) Sign up to another PCP contract

The consumer can sign up to another contract to buy a new car. However, you are not entitled to your original deposit back.

If the market value of the car from your first PCP contract is greater than the GMFV, you may have some equity to put towards the deposit on the new car. However, if the market value falls below the GMFV then you will have to stump up for a new deposit

The advantages of PCPs are clear. They are cheap and affordable ways to access a new car and repayments often have zero interest rates.

However, as outlined above, there are risks.

It is the lack of consumer awareness about these terms and conditions attached to PCPs that the CCPC is now examining. The watchdog is also looking at the regulatory status of both the credit intermediary selling the product and the lender, with whom the consumer enters into the agreement.

CCPC chairwoman Isolde Goggin pointed out that PCP contracts should not be entered into lightly.

“After a mortgage, the purchase of a car is likely to be the biggest financial commitment a consumer will make. From our interactions with consumers, we know that PCP is an increasingly popular way for consumers to finance the purchase of a car,” she said.

“However, these products are relatively new and considering their complexity there is potential for consumer misunderstanding and detriment if they take out a product that may not be suitable for them.”

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