Concern over scale of unregulated finance for new cars

One in three buyers of new cars in Ireland is using a form of finance that is entirely unregulated.

Consumer protection authorities say they have concerns about the regulation of personal contract plans (PCPs) and they have “raised the issue of further regulation” with the Department of Finance and the Central Bank.

PCPs are an increasingly popular form of finance for people looking to buy new cars. They are a form of hire purchase agreement and also require payment of an upfront deposit. But they are more attractive to consumers because they offer lower monthly payments – albeit with a "balloon" payment, formally known as a "guaranteed measure of future value" at the end of a three- or five-year term.

This balloon payment is generally about one-third of the total purchase cost of the car but can be higher. The consumer only owns the car after this final payment is made.

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PCPs can also contain significant provisions in the “small print”, including limits on mileage and requirements to have the car serviced by dealers for the duration of the three- to five-year term of the agreement.

The Competition and Consumer Protection Commission (CCPC) does not regulate the sale of PCPs – though it is responsible for the authorisation of credit intermediaries – and nor does the Central Bank.

The bank only regulates banks. Several motor manufacturers, including Volkswagen and BMW, have inhouse banking operations established to finance vehicle purchase. Volkswagen said that, in relation to its new cars, 39.4 per cent are financed through Volkswagen Bank.

Subprime car loans

Industry sources say that PCPs now account for close to one-third of the market. However, as the Central Bank does not release statistics on PCP financing, it is difficult to get a precise fix on the scale of lending through such channels.

Concern has been brewing worldwide that subprime car loans could cause problems in the car financing market.

The CCPC has said that some car finance products are not necessarily transparent, meaning “some consumers could take out a product, which may not be affordable, or in their best interests in the long term”.

While Max Warburton, an analyst at Bernstein Research, said in March he was "reasonably relaxed" about credit quality in the sector, he noted "lower credit score customers usually seek financing from independent lenders".

In the Irish market, subprime lenders have been picking up car finance business. In November 2016, Bluestone Asset Finance announced it had completed a €25 million securitisation of an Irish car finance portfolio. The company describes its customers as those who “are self-employed, have little or no credit history or who experienced financial difficulties during the financial crisis but can now demonstrate a stable income”.

Mr Warburton has said rising car sales have been driven by the expansion of car financing, noting some car finance products are structured in “clever ways”. “Leases, personal contract plans, balloon payments and all sorts of other fun and games have made vehicles appear easier to buy for the consumer,” he said.