It seems so tempting. Put down a deposit, usually in the shape of the car you are trading in, pay some affordable monthly fees and drive away in a shiny new car, with the promise of rolling your deal over into another new car in three years.
The personal contract plan (PCP) is part-panacea, part-silver bullet for the car industry ills of this post-recession world. It’s also the first step on the road to making car ownership like buying a mobile phone. Buy, pay, upgrade.
It’s also a financial package which is potentially leaving car maker, car seller and car owner at considerable financial risk, especially if great care is not taken in the selling and buying of the product. PCPs rely on the car being sold retaining an expected level of second-hand value in order to cover the looming “final payment”.
Critical element
As the buyer, you’re insulated from that final payment by the guaranteed minimum future value (GMFV). That, agreed as part of the contract, guarantees that the value of the car at the end of the agreement will be sufficient to cover the final – or “balloon” – payment.
It should also include an amount of “equity” which will act as a deposit on the next vehicle, assuming you roll over your agreement into a new one, which most customers are expected to do.
This latter part is the critical element for the motorist. It represents the deposit for the next car if the customer wants to roll over into another PCP.
So the dealer is somewhat at risk: they have to accept that the car is worth what it was promised to be, even if second-hand values have weakened. Which is good news, right? As it means the dealer has to accept that value and can’t charge you the extra.
Well no, because if the actual value of the car has slipped, the equity has been burned up, and suddenly you have a smaller deposit, or none at all, for your next car. You can walk away, but you may be walking for some time as you will have nothing out of the deal to go towards your next set of wheels.
"The growth of PCP means a glut of relatively young used cars will hit the market when those three-year deals expire. It is very likely the used car market will begin to see values start to slide over the coming years," says Michael Rochford, managing director of Motorcheck.ie.
“The consequence for the consumer is that their next PCP may not be as affordable due to reduced residual values, whereas for the manufacturers and banks they may end up taking a hit on disposal prices if they don’t price their books accordingly now.
“The advice to consumers is to remember that you won’t own the car at the end of your PCP, so plan in advance what you are going to do at the end of the finance term.
“Make sure you have access to the funds to either buy out or refinance the car at the end of its PCP term, or make sure you save for a deposit on a new PCP as you won’t own a car to trade in when you are going for your second PCP.”
The problem is that the used market is unpredictable, and it's not just supply of cars that weighs on prices, according to Paul Linders, dealer principal of the Linders Group.
“My personal view, for what it’s worth, is that the value of sterling will have a bigger effect on used car prices here than will the numbers of second-hand cars coming into the market from PCP deals,” he says.
“I think the growth in the market can absorb that number, although clearly if more cars come off PCP than the market wants to buy, then we’ll be in trouble.”
Worrying aspect
So, oversupply of cars or Brexit could undermine your PCP deal, alongside dozens of other potential economic influences that will sway used car prices in the coming years.
Another worrying aspect is that PCPs are not strictly a licensed financial product. Theoretically, they come under the description of a hire purchase (HP) agreement and are overseen by the Competition and Consumer Protection Commission (CPCC).
That organisation told The Irish Times that while it can investigate the sale of car finance when a specific complaint is made, PCPs as a specific product were not regulated, but treated as a form of hire purchase and covered by the Consumer Credit Act 1995.
A spokesperson said: "Our predecessor, the National Consumer Agency, on a number of occasions advocated strongly for hire purchase, including products such as PCPs, to be defined as financial products and to fall under the Central Bank's remit. We continue to share that view."
Irish tradition
When we approached the Central Bank for a comment, it said PCPs were covered by the CPCC, and so it seems that, in the grand Irish tradition, there are too many organisations and departments covering the same ground, but the legislation which gives them their various remits leaves too many gaps between.
The Central Bank doesn’t see a PCP as being a specific enough product, and the CPCC can only respond to a specific complaint. Meanwhile, the consumer is left hoping the person selling them the product is keeping things above board.
Ultimately none of this is a problem if sales staff are suitably trained to help someone decide if PCP is the right deal for them.
Brian Merrigan of BMW Financial Services, the German brand's "captive" banking arm, said there could be bumps in the road ahead, but poured some oil on the worries by saying that as long as prudence has reigned, there's enough elastic in the system to compensate for fluctuations in value.
“Once the levels of used car stocks increase across the country, values do drop; that’s pure market conditions,” he said.
“However, the key to the success of a PCP is at the beginning of the new agreement. Speaking specifically for BMW and Mini, we always look for a deposit or equity up front in order to bridge the gap between what is borrowed and the guaranteed minimum final value (GMFV),” says Merrigan.
“The goal is that a large proportion of the customer’s initial deposit or equity is preserved in the value of that car when he comes to deal in three years’ time.
“This is the key to its future success. If all equity is burnt up in deal number one, then it means the next one is harder to balance. In BMW Financial Services’ case, to date we have only had two customers exercise their right to hand back the car at the end of the agreement, and in both cases we re-marketed them and did not make any loss.
“We strongly believe that PCP is not for everyone; if a customer is a high-mileage user or not particularly car proud or indeed has a large deposit or equity, then no, PCP is not the right offering. A short or medium HP agreement is probably best. ”
According to experts, the best way to initiate a PCP is to put down a 20 per cent deposit of the car’s price – no more, no less. Less and you’re going to come up with less deposit at the far end, more and you’re not getting the best value. But you have to go in with your eyes open. And if you breach the mileage limits and standards of maintenance and upkeep of the vehicle, this will undermine your deal, never mind the macro-economic concerns.
Lack of control
There also remains severe concerns over regulation in the area. Thanks to that gap in oversight between the CPCC and the Central Bank, you are very much reliant on the professionalism and sanctity of the sales staff in the dealership from which you are buying. These staff are under constant pressure to meet monthly targets and make commission on sales.
The potential for a payment protection insurance-style backlash is clear, as is the potential for you to lose most or all of your deposit for your next car if the deal is wrong and the market shifts.
Worse again, that lack of control from the Government means there is only common sense holding some back from changing the way they do business.
One senior source in the motor trade said: “At one industry meeting, a group of dealers was trying to say that they should be allowed to set their own minimum future values, rather than letting the experts do it. I stuck my hand up and told them they were all mad, that it was like turkeys voting for Christmas.”
It may be wise to have “Caveat emptor” tattooed on your hand before signing on the dotted line.
