Fianna Fail's Finance Spokesman, Michael Mc Grath, has warned that motorists using PCP's may be exposed, saying there is a lack of regulation of the contracts - with neither the Central Bank or the Competition and Consumer Protection Commission acting as regulator.
PCP's work on the basis that there is a final lump sum payment by the motorist after monthly repayments are made and the the customer takes ownership of the car. They are now perhaps the most popular way for drivers to buy new or second-hand cars. However, Mr Mc Grath but points out that the Consumer Protection Code does not apply to the PCP's.
"As a result of the need to pay a lump sum at the end of the contract, the monthly repayments can be considerably lower than repayments under a HPA for the same loan amount and this is of course holds a certain attraction for the consumer", he says.
"This is deeply worrying considering that, after a mortgage, these types of contracts are some of the biggest financial commitments a person can make. What’s clear is that the same level of protection is not being offered to consumers as with other financial products.
"Within the world of finance, data is crucial yet the Department of Finance does not even collate information and data on this area".
Central Bank does have a role.
The Department of Finance says consumers concerned about the activities of credit intermediaries can contact the Competition and Consumer Protection Commission as both it and the Central Bank have central functions and legal powers in relation to the provision of hire-purchase agreements of which PCP's are a type of.
The Competition and Consumer Protection Commission has a consumer guide explaining the pros, cons and FAQ's around PCP's, which follows:
WHAT YOU NEED TO KNOW ABOUT PERSONAL CONTRACT PLANS.
Low monthly repayments
A choice of what to do at end of repayment term
Quick and easy to arrange
Mileage and condition of car affects the costs
Total amount paid may be more than with hire purchase
Have to pay the outstanding balance to keep the car
You don’t own the car until the final repayment
How does a PCP work?
A PCP is a type of hire purchase agreement. You don’t own the car until you have made the final repayment. With a PCP, repayment is broken down into three parts:
The deposit – the deposit is typically between 10% and 30% of the value of the car, depending on the finance provider. Your deposit can be paid in cash or if you already own a car, you can trade this in for part or all of the deposit, depending on its value.
Monthly repayments – PCP agreements are usually made for terms between three and five years. PCPs generally have low monthly repayments, which can make them seem more affordable when compared to other forms of finance.
Guaranteed Minimum Future Value (GMFV) – The GMFV is the amount you will have to pay to own the car at the end of the agreement. It is calculated by the finance company and is based on its estimate of the future value of the car at the end of the agreement, e.g. three or five years. It takes into account such things as, the car you are buying, length of agreement, the condition of the car at the end of the agreement and your annual mileage.
When your agreement ends: At the end of the PCP agreement, there are a number of options depending on whether you want to carry on or end the agreement:
Pay a final payment (the GMFV, also known as a ‘balloon payment’) and keep the car.
Hand the car back. Be aware that if you do opt to hand the car back, while you generally don’t have to pay the dealer anything, you might end up having to pay a penalty if you have not complied with all the terms and conditions. You also will no longer have the car.
Put the car down as the deposit on another car and enter into another PCP agreement. It is important to be aware that the deposit you put down for the first car will not be given back to you if you use the car as a deposit for a new PCP agreement. The equity you have built up in your monthly repayments and the difference of the GMFV is what you put towards the new car. All you have to put towards the new deposit is whatever equity you built up from the first PCP. This equity may be less than the deposit required for the new PCP, so be aware that you might have to top the deposit up. This could amount to a couple of thousand euro.
EXAMPLE OF A TYPICAL 0% APR PCP REPAYMENT SCHEDULE:
Deposit - €6,074
Monthly repayments (for 36 months) - €196.83
Guaranteed Future Value (final payment) - €7,086
Comparing a PCP with a personal loan:
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 agreement, you don’t own the car, you are essentially hiring it for an agreed period of time, typically three – five years. You only own it when you make the final repayment. This is important because if you were to run into financial difficulty during your PCP agreement, you cannot sell the car to pay off your debt.
How flexible is a PCP ?
These agreements are among the least flexible forms of finance. Because the repayments are fixed for the term of the agreement, you usually cannot increase your repayments each month if you wish to do so. If you want to extend the term, you may be charged a rescheduling fee.
What to watch out for:
Before you sign up to a PCP make sure you know who is providing you with the finance, that you fully understand the terms and conditions attached and you know what other things you need to look out for such as:
Mileage: At the outset you agree the number of kilometres you are going to clock up over the period of the agreement. If you keep to this, the car will have a GMFV at the end of the agreement. If you exceed the agreed annual mileage you may find that you owe more on the final payment than you think – even if you were to hand the car back it would cost you money. This is often charged at a set fee per kilometre over the agreed estimate.
Half rule: The ‘half rule’ allows you to end a PCP agreement at any time and return your car, but you have to pay half the purchase price. If you have not yet paid half the purchase price you can still return the car but you will owe the difference between the repayments you have made and half the purchase price. If you find yourself in financial difficulty, returning the car using the half rule may be a good option for you because the finance company may decide to repossess the car if repayments are not met.
Small print: At the beginning of the contract you will agree to a number of different terms and conditions. For instance, the cap on the number of miles/kilometers you are allowed to clock up over the period of the agreement. They may also request that you commit to certain car servicing requirements. Always read the small print before you sign up.
Finance options: When comparing finance options, take the time to compare the total amount payable on a personal loan (cost of credit) with the PCP cost (the deposit, plus monthly repayments and final payment). Use our personal loan cost comparison to help you. Make sure you also compare the terms and conditions of each option.
Fees and charges: Always enquire about any additional fees and charges. You are entitled to a list of all additional charges and fees, so ask the garage for this before you sign up to any agreement. For instance, ask if there is any documentation fee for setting up the agreement, missed repayments fees or repossession charges.
How is interest charged?
If interest is charged, the rate on PCPs will vary depending on the finance company and the car you are financing. Interest is calculated at a fixed rate on the total amount you borrow for each year of the agreement. If you pay off the agreement earlier than planned, this type of agreement will often work out more expensive than if you had taken out a variable rate personal loan. Also, the deposit you pay at the beginning of the contract will have an impact on the amount of interest you pay.
Can your car be repossessed?
With a PCP, your car can be repossessed if the terms of the agreement are broken, for example, by missing repayments. If you have paid less than one-third of the purchase price, the car finance company can take back your car without taking legal action against you. If you have paid more than one-third of the purchase price, a lender cannot repossess the car without taking legal action. In addition, the car cannot be repossessed from your home, regardless of how much money you’ve paid back.
If your car is repossessed, the finance company will generally sell the car and the money goes towards the outstanding debt, but you will still have to make repayments until the entire debt is paid off.
PCP and your credit record:
As with other types of credit, when you take out a hire purchase agreement, your lender will send details of the repayments you make to a credit-reference agency, such as the Irish Credit Bureau (ICB). Find out more about what information is shown in your credit history.
It is worthwhile checking the registration documents of a second-hand car to make sure that it is not already owned by a finance company, in which case the person trying to sell you the car does not actually own it and therefore does not have the right to sell it to you.