Central Bank warns of PCP car finance debt threat

The Central Bank has warned of the "increased indebtedness" of consumers who sign PCPs, as well as the banking system's exposure to the car market with the controversial scheme now the go-to source for finance in the Irish market.

PCPs, or personal contract plans, were introduced following the economic crash as sales of new cars fell by 63 per cent in 2009. They address situations whereby consumers do not have enough trade-in value to use their car as a deposit for a new one.

PCPs generally involve an up-front deposit of between 10 and 30 per cent; low monthly repayments spread over 36 months and a balloon payment at the end. This payment is what the lender estimates the value of the car will be at the end of the contract.

As the scheme is relatively new to the Republic, there has been limited analysis of its long-term consequences, but the Central Bank published an economic letter on the matter on Wednesday.

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The regulator raised a number of issues for consideration, including the “increased indebtedness” of consumers, with its analysis showing that many people take out loans to finance the final instalment, pushing up the overall cost of credit.

Concerns

It also raised concerns about the “extent of affordability and credit checks” on PCP arrangements and the incentives banks offer to customers to retain business.

On that note, it warned of the banking system’s “exposure to the car finance market” should a shock to the second-hand car market occur.

The Central Bank particularly highlighted the rise in the value of the euro against sterling after Brexit, which resulted in a 95 per cent jump in the number of cars being imported from the UK.

“The fall in Sterling due to Brexit has led to an increase in cheaper used car imports, potentially depressing future used car prices and pushing existing PCP contracts towards negative equity,” it said.

As of the end of 2017, some €1.5 billion was owed by Irish households to financial institutions as part of 126,249 PCPs.

“We find that PCPs are the current driver of the growth in bank-related lending to Irish households for non-mortgage purposes, and have become the most prevalent source of car finance in the Irish market since April 2016,” the regulator said.

Resident banks accounted for 80 per cent of the market in value terms, and almost 90 per cent in contract terms, with the remainder relating to PCPs advanced by non-bank entities.

Increased

Contract average values have increased over the past number of years, from about €15,000 to more than €23,000. New contracts agreed during 2017 were 8 per cent lower than 2016, but were higher than previous years.

Interest rates charged on new PCPs averaged 4.9 per cent for 2017, with sizeable variation between providers. For non-banks, the average interest rate was higher at 5.91 per cent.

The Central Bank said the past three years have seen “significant growth” in the stock of car-related debt on Irish banks’ balance sheets, with an increase of 136 per cent to stand at €2.8 billion at the end of 2017.

PCP related finance was the main driver of this growth, accounting for 53 per cent of the increase. The outstanding amount of bank-funded PCP debt has increased 254 per cent over the past three years.

Of note in the data is that PCPs accounted for almost 40 per cent of car finance drawdowns by value during 2017. However, they represented just under a quarter of new car finance contracts.

Contract values for other forms of car finance averaged €12,500 in 2017, suggesting these forms of finance are popular for less expensive and second-hand cars.

The bank said approximately 30 per cent of new cars are financed by PCP contracts, while less than 10 per cent of PCP contracts relate to second-hand cars.