Do you know the Risks of Personal Contract Plans (PCPs)?
If you’re planning on purchasing a new car, you may be considering a Personal Contract Plan (PCP). In recent years, PCP has become one of the most popular ways to buy a car in Ireland. Its popularity is mainly due to the low monthly repayments associated with PCP. But it is important that consumer’s know the risks associated with PCP before they sign up.
How Does PCP Work?
PCP is a type of hire purchase contract. This means that unlike other types of loans, you do not own the car until the last repayment has been made. PCP is divided into three parts:
1. Deposit
Before leaving the garage with your new car, you will need to pay a deposit on the car. This can range from between 10%-30% of the total value of the car.
2. Repayments
PCP’s typically have lower monthly repayments which is why PCP can seem like a good alternative to taking out a personal loan. Your repayment term can last between 3 and 5 years, depending on what type of plan you agree to.
3. Final Lump Sum
Before you agree to taking out a PCP, you must agree to a Guaranteed Minimum Future Value (GMFV) with your finance company. This is based on how much the vehicle is estimated to be worth at the end of your contract. GMFV is the amount you’re required to pay to own the car at the end of the contract. After the monthly repayment period, you have the option to pay the GMFV to own the car, hand the car back to the garage (once certain terms are met i.e. you haven’t exceeded the mileage limits) or enter a new PCP contract to buy a new car.
Pay the GMFV
Once your repayment term is up, you will need to pay a lump sum final payment to own your car. You may also be charged completion fees. This is calculated at the start of your contract and is based on an estimated future value.
Hand the Car Back
If you cannot afford the lump sum payment at the end of the repayment term, you may decide to hand the car back. It’s important to note that if you have exceeded the mileage limit or caused damage to the car, you will need to pay the garage additional funds to give the car back without purchasing it.
Buy a New Car with PCP
If you wish to update your car to a newer model, you will need to sign up for a new PCP contract. To enter a new PCP contract you will need to pay a deposit again. The deposit from your first car cannot be used to fund a second PCP deal. However, if the market value of your car is greater than the GMFV at the end of your contract, you may put the difference towards the deposit on a new car. It is important to discuss the terms of the contract relating to what happens if you decide to enter a second PCP contract in the future with your provider.
What are the risks of PCP?
Large Lump Sum Payment
PCP can be tempting when purchasing a new car due to the low monthly repayments, but it’s important to remember that you do not own the car until the final GMFV is paid at the end. The low repayments can result in some consumers buying a car that they can’t actually afford. Therefore when the 3-5 year repayment period has concluded, consumers may struggle to pay the large lump sum. If the buyer cannot fund this payment, the car will need to be given back to the garage. If you are having difficulty paying off your final lump sum, St. Raphael’s now offer a PCP Clearance Loan to help spread out the costs.
Mileage and Depreciation
At the start of your contract, you must agree on the number of kilometres you are going to clock up over the contract period. If you exceed the allocated mileage allowance, you will owe the finance company more than the GMFV. An additional fee will also be applied if you decide to hand the car back to the garage. This means that you may have to pay more back to the finance company than you had originally budgeted.
Affording Repayments
Throughout the repayment period, your circumstances can change which could result in difficultly making repayments. PCP is less flexible than most other forms of lending. If you need to spread out repayments or extend the closing date, you may be charged a rescheduling fee. Unlike other types of car loans, with PCP your car can be repossessed if the terms of the contract are broken, which includes missing repayments.
Final Payment may be more than market Value
When taking out a PCP, you and the contract provider agree on a future value of the car. However, as market trends can change over 3-5 years, the car may be worth less than expected at the end of the contract, but you will have to pay the earlier agreed higher price.
Car Ownership
When you purchase a car through a PCP, you do not own the car until the final repayment has been made. With other types of loans such as a car loan from a credit union, you borrow the money and own the car immediately. This means that if you need to sell the car at any stage, whether it be to go travelling, a change in circumstances or for financial reasons, you will need to receive permission from the finance company first. This may result in additional fees.
Lack of Regulation
There is a lack of regulation surrounding PCP in Ireland compared to other lending options. This means that consumers aren’t as protected by the Central Bank or the Competition and Consumer Protection Commission compared to other financial institutions such as credit unions.
