Irish consumers don’t understand PCP car finance, ESRI suggests

Irish consumers don’t understand aspects of personal contract plans (PCP) and, in particular, are unclear about what happens at the end of a transaction, research from the Economic and Social Research Institute (ESRI) has found.

The study, conducted with the Competition and Consumer Protection Commission (CCPC), found that while PCPs are an increasingly popular form of car finance, consumers’ grasp of them is poor.

“Given that buying a car is the second biggest financial transaction most people undertake, it is vital that consumers entering these deals know what they consist of and what they are getting into,” ESRI researcher Terry McElvaney said.

What are PCPs?

The benefit of a PCP is supposedly double-sided - car buyers enjoy reduced monthly repayments and are effectively guaranteed that the residual value of their car will, at the end of the finance period, cover the remaining cost of the loan.

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The Guaranteed Minimum Future Value of the car (GMFV) is built into the PCP agreement at the beginning. Generally speaking, it’s under-estimated, to allow for potential market fluctuations and to allow owners to build up “equity” in their car - a value over and above the GMFV which will then act as a deposit on their next purchase.

For the motor trade, car dealers enjoy the increased sales that come with more affordable credit, receive bonuses from financial houses for encouraging people to take out loans, and further benefit from customers returning to ‘roll-over’ their PCP into a new agreement for a new car. Renewal rates for PCP buyers are running as high as 60 per cent, depending on the brand in question.

For the most part, the guaranteed future values at the end of the contract are underwritten by the dealers, meaning that they are exposed to any collapse in second hand car prices below what they promised in the contract. Consumers are at risk too - if second hand values fall, their car will cover the final cost of the loan, but there may be nothing left in its value to act as a deposit for a new car if they chose to roll-over, or worse; they may have to pay a final loan amount that will be more than the effective value of the car.

The consumer watchdog, in a report issued in March, explains that PCPs address the circumstances in which consumers don’t have enough trade in value to use their car as a deposit for a new one considering they generally involve a relatively low up-front deposit, low monthly repayments and a large payment at the end. “In effect, the largest financial burden on the consumer is shifted to the future.”

Regulation

There are also concerns about the fact that in Ireland, PCPs are not licenced as a specific product, but comer under general financial conduct rules. The ESRI suggested stronger regulation of these products may be required, "with a particular focus on the information given to car buyers at the point of sale".

The rationale for that is the lack of understanding consumers have after putting down a deposit, making three years of monthly payments and staying within the agreed mileage limits before realising they own little or no equity in the vehicle.

The results showed that almost one quarter of the time, when rating PCP offers, consumers judged an inferior deal to be better than another that was objectively superior.

Comprehension of the deals was poor, the study found, with 23 per cent of participants performing “no better than chance”.

The findings raised concern for the ESRI as the scale of misunderstanding “implies that many car buyers are unlikely to grasp important aspects of these large financial transactions”.

Brian Cooke, deputy director general of the Society of the Irish Motor Industry (SIMI) said it’s in the interest of the motor industry that people do understand PCP deals. “The best customer for any retailer is the repeat customer. The thing is you want your customer to have a good experience,” he said.

A separate CCPC issued in March showed PCP agreements are now used to finance about one third of new car purchases by consumers in Ireland.

The ESRI study used a representative sample of 100 consumers.