Are you buying a new car and considering using finance? How do you know if PCP is right for you?

May 30, 2018

Personal Contract Plans (PCPs) have quickly become one of the most popular forms of car finance with approximately one third of new cars now being bought using this type of finance. PCP finance is also increasingly used to finance second hand cars. PCPs usually involve low monthly repayments and a relatively quick approval process on the garage forecourt. Research published in a recent report by the Competition and Consumer Protection Commission (CCPC) showed that these products are complex and consumers can find it difficult to understand how they work, particularly at the end of an agreement.

In the run up to the sale of new ‘182’ registered cars, the CCPC is running an information campaign to help consumers understand PCPs so that they can make informed decisions on what is best for their circumstances.

Speaking today about the campaign, Fergal O’Leary, Member of the Competition and Consumer Protection Commission said; “When you are buying a car there are many considerations to take into account such as makes, models and new versus second hand. For most consumers there is also an added question of what car finance to use. This decision requires careful consideration, however, our research shows that consumers spend less time researching finance options compared to the time spent choosing a car; on average four-and-a-half times longer.”

Key points of information about PCP finance

PCP finance is very different to other types of car finance because a large part of the payment is made at the end of the agreement. This means there are often low monthly repayments with a lump sum at the end, called the Guaranteed Minimum Future Value (GMFV). A complicating feature of PCPs is that, at the end of the agreement, a consumer has three options: to pay the GMFV, hand back the keys or start a new PCP agreement for another car. There are conditions attached to all three options which impact on your use of the car and how much you will need to pay at the end of the term. It is important that consumers know that they don’t own the car until the GMFV is paid.

Research carried out for the CCPC highlighted that many consumers who had a PCP planned to enter into a new agreement at the end of their current term. For many consumers who intend to trade in their car for a newer model, they will need to pay a deposit. There may be equity in their current car if, at the end of the term, the GMFV is lower than the market value of the car. This can be used as a deposit for the new car.

Factors such as the condition of the car or changes in the second hand car market can impact on the market value and so the CCPC cautions consumers to be aware that there may not always be equity in an older car to cover the deposit on a new one.

If a consumer aims to eventually own the car, it is important that they don’t just look at the cost of the monthly repayments, but consider how they will pay for the GMFV at the end. If a consumer plans on handing back the keys or entering into a new PCP agreement, there are certain conditions they will need to meet such as mileage limits and servicing requirements, and they will need to return the vehicle in a certain standard. So it is very important that consumers check all of the details before they sign up.

Speaking about the importance of consumers understanding what they are signing up to, Fergal O’Leary said; “PCPs are significant long-term financial commitments. Our recent report into the market showed that the average PCP agreement, in 2016, was valued at €25,000. The complexity of PCP products, coupled with the value of these agreements, means that it is extremely important that consumers are able to understand what they are signing up to. This can only happen when consumers understand their options and how the product works. Our campaign helps consumers in this regard and makes it easier to understand PCP agreements and to choose a financial agreement that is right for their circumstances”.

The CCPC’s information campaign runs from 14 May – 17 June. More information about how PCPs work and what to watch out for is available on ccpc.ie

Additional information

In March 2018, the CCPC published a detailed report analysing the PCP market. The report contains the first public analysis of the PCP market in Ireland, explores consumer experiences to date and assesses the consumer protections in place for those who sign up to PCP contracts. Broadly, those who have used this type of finance reported positive experiences. 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.

Recommendation one of the report was; “To help consumers understand PCP finance, the CCPC would review the information it provides to consumers in light of the findings of this report and continue to conduct public awareness initiatives.”  This information campaign was informed by the findings of this report and acts on this recommendation. A copy of the report is available here.

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