THE WORLD OF CAR-BUYING can be a tricky one to navigate. To make it easier on our readers, we want to get an expert’s support for when you’re making what is a huge financial decision.
This week, we got the Director of Communications and Market Insights at the Competition and Consumer Protection Commission (CCPC) Áine Carroll to weigh in on the latest buzz in the car finance world – personal contract plans or PCPs. Here’s what one of our readers was wondering:
I really need a new car and I’m considering my payments options right now. I’ve heard about PCP and how the monthly repayments are very low and that you can arrange finance through the car dealer. I’ve also heard it’s a lot easier to get approval. It all seems too good to be true – is it?
Dear car buyer,
Making a decision about car finance really depends on the individual, so without telling you what is right or wrong for you, I think it’s best to break things down about PCP. So here it goes…
The low monthly repayments can make driving a new car appear very affordable. PCPs can also be a tempting choice as they are easy to arrange – you can organise your finance and buy the car in the one place (from your car dealer).
You’re essentially hiring the car
Unlike traditional car loans where the repayments are spread out equally during the loan term, with a PCP, a large part of the cost is deferred until the end of the contract in the form of the Guaranteed Minimum Future Value (GMFV). Until you make this final payment, you don’t own the car – you are hiring it.
You need to think about how you will pay the GMFV long before your contract ends if you want to own the car. If your circumstances change and you need to sell the car during the contract, you will need permission from the owner to sell it, which is the finance company.
You don’t have any guarantee about future car values
At the end of the agreement, there might be a difference between the GMFV and the market value of the car, giving you some equity in the car. But depending on the market value and condition of the car, you may have no equity at all.
This is important if you intend to use equity you have in the car as a deposit for your next PCP. If you are planning on trading the car in at the end of the agreement, think carefully about how you would come up with a deposit for your next PCP.
You’ll have a hefty final payment
The low monthly repayments – which can make new cars appear very affordable at the start of a PCP – may mean that you enter into a contract which could be unaffordable for you when you take into account the size of GMFV or the final payment.
You’ll need to watch your mileage and damage
There are mileage restrictions, wear and tear conditions and crash damage conditions that can affect the amount of equity at the end of the agreement or result in you having to pay a penalty if you don’t stick to them.
With a PCP or hire purchase, you do not own the car so you can’t sell it if you run into difficulty, unless you get permission from the finance house. The other potential issue is that you may not have enough equity in the car at the end of the contract to use as a deposit if you want to enter into another PCP agreement.
This means you would have to find the money for a deposit elsewhere, maybe from your savings. Other issues which can arise are people being penalised for not sticking to terms and conditions – specifically the agreed annual mileage limit and conditions around servicing of the car.
People may also need to set some money aside to meet the balloon payment/GMFV if they want to buy the car outright at the end of the contract. Or if you want to trade in the car and get a new PCP at the end of the contract, you need to think about how you will come up with the deposit.
And regardless of how you finance the car, consider the cost of tax, insurance and maintenance costs.
These products are complex and people can find them hard to fully understand, particularly the options at the end of the contract. At that point, a consumer has three options: to pay the GMFV, hand back the car or enter into a new PCP.
For some people who intend to trade in their car for a newer model or to trade up, they will need to pay a deposit. The deposit you put down for your first car won’t be given back to you and if the market value of your car is greater than the GMFV then you may have some equity to put towards a deposit on a new car.
For example, if the GMFV is €10,000 but the car is worth €12,000, you will have €2,000 to use as a part deposit for your next car. But the value of the car will depend on its condition.
If the market value of the car is less than the GMFV, then you may not have any equity in the car at the end of the contract. If you have no equity to use as a deposit on your next car, you will need to fund it another way (such as savings).
Do you think you know enough about your rights when it comes to buying a car? If you think it’s tricky business, you’re not alone. Make sure you’re fully up to speed on what you’re entitled to by visiting the Competition and Consumer Protection Commission’s car finance section before the next time you buy a new car.
To embed this post, copy the code below on your site
have your say