The Central Bank has found the personal contract plan (PCP) car finance market is considerably smaller than previously thought, but has reiterated its concerns about the sector.
In March, the regulator warned of “increased indebtedness” of consumers who sign PCPs, as well as the banking system’s exposure to the car market with the scheme becoming the go-to source for finance in the Irish market.
At the time the Central Bank found there were 126,249 outstanding PCP contracts but on Thursday it revised that figure down by almost 50,000 contracts to 76,582.
The downward revision came due to car companies over-reporting the number of outstanding PCP deals. Some smaller car companies included expired deals in the reported number whereas they should have only included outstanding contracts.
In the first six months of this year there was €347 million of new lending in PCPs, down 15 per cent than the same period in 2017. The total market is now equivalent to about €1.4 billion.
Trade-in value
PCPs 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.
In its March economic letter the Central Bank 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.
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.
Highlighted
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.
Figures earlier this week showed consumers in the Republic are continuing to take advantage of the weakness in sterling by buying used cars from the UK. The Central Statistics Office said the number of imported vehicles licensed in the State for the first eight months of the year rose by 10.4 per cent to 67,060 . In contrast the number of new cars licensed here fell by 4.5 per cent to 111,461.
