PCP – All that glisters is not gold!

PCP, has temptingly low monthly repayments and can often seem to be the best option, however PCP (Personal Contract Plan) is a hire purchase agreement and you need to read the small print to see if it really is a deal for you. In Ireland, Bank of Ireland Finance is the main supplier of PCPs and your contract is with them, not the garage.

You pay a deposit (usually by way of trading in your old car and deposit amounts can range between 10% – 50%) and agree a finance package. That package lets you pay off an agreed amount of the value of the car, leaving a “balloon” payment at the end. The “balloon” end payment keeps monthly payments artificially low but financing this, when the car is three or five years old can be difficult and is often done by rolling over the loan into a new one.

Some firms also charge documentation or arrangement fees of around €150 to set up the contract and you may not hear about this until you go to pick up your car, at which time you are just dying to get behind the wheel, so don’t question it.

Until the final payment is made the car is not yours and can be repossessed if payments are missed. If you have paid less than a third of its value, the finance company doesn’t even need a court order to do this. It is a ‘secured’ loan.

PCP’s say they guarantee the residual value of your car. This guaranteed minimum future value (GMFV) is allegedly designed to leave enough value in the car to pay off the balloon payment and, theoretically, sufficient equity to act as the deposit for your next purchase.

At the end of the PCP agreement, you generally have 3 options:

  • hand back the keys and walk away, debt-free (with no car & no deposit for your next car)
  • pay the final balloon payment and keep the car or
  • trade in the car against a new one, paying off the balloon as you do so.

In order to hold on to the car you must come up with this considerably high value balloon payment.

Now here’s the small print (read it carefully on your documentation) ……

There are restrictions on mileage and condition. In order to be able to set the GMFV, the car maker has to have some idea of what sort of state the car will be in at the time of trade in. So, you have to maintain the car properly, stick to a main-dealer servicing plan and to an annual mileage limit.

If you exceed the mileage, there is a set fee. For example 6 cent per kilometre. This means that if you are travelling 1,000km in excess per annum you will incur a reduction in your GMFV of an average of €180. You must also give back the car to the dealer you bought it from, locking you into that dealer for each successive car you buy.

Ask yourself if you are at risk of going over the mileage quota on your PCP agreement?

1,000km is racked up pretty quickly. If you have family or friends around the country or like to head off on weekend breaks to the coast, you can easily put 1,000km on a car inside of a few months. Condition of the car is an issue too; every bump and scrape will be taken into account come trade-in time.

Potentially, a bigger issue with PCP is that it restricts what you do with the car during the term. If you’ve taken out a credit union loan, then the car is yours to do with as you please. Rack up mileage, add a new stereo or, crucially, sell it if you need to.

On a PCP, you cannot decide to sell the car if your personal or financial circumstances change. With a loan, you can, even if you then have to pay back the balance of the loan out of the price of the car. But at least the profits are yours.

PCPs are a way of trying to ensure that you will come back and buy another car from the same dealer or manufacturer. The whole purpose of the balloon payment and the GMFV is to set up a situation where the easiest and simplest option is to roll over into a new car and a new plan.

If you decide on the hand-the-car-back option, you don’t get to make anything out of the car’s equity. No matter how well you have kept it and maintained it, if you hand it back, the value above the bubble payment reverts to the dealer and you get nothing.

You are given the impression that you have valuable equity at the end of the period again, but you don’t.  You do not really have equity for the next car, in that the value at the time equals the balloon payment – so you are starting again with nothing. You’re not just back to square one at the agreement expiry date but are actually worse off because you will have also “lost” your deposit for your next car.

So in effect, while the impression is that you could be saving money in the short term, you will actually be spending more over a longer period.

If you find you can’t meet repayments, even just a couple, the finance company will try and get you to sign a ‘Voluntary Surrender’ (VS) document. If you do, they repossess the car but you are still liable for the outstanding debt. You will also have to pay towing and search fees, and possibly wear and tear payments if they deem it to be in worse condition than expected.

An average €20,000 car with 0% APR PCP finance, will mean that a PCP balloon payment of approx. €7,000 is due at the end of 3 years.

To borrow €7,000 from us over 3 years @ 8.2% (APR 8.5%) costs €220.02 per month, max. cost of loan is €917.64.

PCP was created for one purpose – to help car makers sell you a car today and to more or less guarantee that in three years you’ll be back for another.

Crunch the numbers, talk to us about a car loan before making your final purchase decision or if you need to borrow to pay off a PCP balloon payment; give us a call on 056-7722042 and remember as Shakespeare would say – all that glisters is not gold!

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