PCP Car Finance - A ticking time bomb


#1

The Central Bank are now tracking PCP car loan data and found that at end-June 2018 there was outstanding bank lending for PCPs of €1.243 billion from 69,668 contracts

You can find the latest figures in table A.19 in 2nd tab (Table A.19 - Outstanding)
centralbank.ie/statistics/d … heets-data

I make the June 2018 average loan as €17,842 (1.243bn / 69,668)

Some recent reports have been conducted into the use of PCP

An Overview of the Irish PCP Market (Revised Data)

by Central Bank, March 2018 data revised in September 2018

centralbank.ie/docs/default-source/publications/economic-letters/vol-2018-no.2—an-overview-of-the-irish-pcp-market-(sherman-heffernan-and-cullen)-revised-september-2018.pdf?sfvrsn=6

Review of Regulation of Personal Contract Plans

report by Michael Tutty, a former secretary general of the Department of Finance, September 2018

finance.gov.ie/wp-content/u … -final.pdf

Personal Contract Plans: the Irish Market

ccpc.ie/business/research/m … sh-market/

report by CCPC, March 2018

There are obvious risks here for loose lending practices.

Tutty finds they are in legal limbo as

He also finds the CB are under declaring the true figure for PCP as they are only collecting stats from

This is potentially misleading as the media are now reporting the new, smaller figure as the true figure even though we know they reduced their survey population per above

irishtimes.com/business/tra … -1.3628052

For me, the ticking time bomb is because of how PCP car loans are structured. You pay 10-30% up front, low months repayments over 36 months, with a lump sum required at the end. I believe many people never pay this lump sum and instead roll the loan forward to their next new car. To my minds it’s almost like a Ponzi scheme where they will never fully repay the lender…

But when the next recession hits, what happens when the lender wants their money back?


#2

Nama on wheels. ‘You can’t drag me kicking and screaming out of the ‘family car’’. Actually they already had a term for that, didn’t even have to invent one.


#3

Unlikely. PCP is a type of hire purchase. I can’t see any court upholding your right to keep a car you only hired. No, the risk will be for the car retailers, getting all those second hand cars back that there is no market for.


#4

If God was to ever invent a financial product suited to the Irish mindset it would be PCP car finance. It appeals to the pikey ‘I’m doing well for myself, I’ve a new car don’t I ?’ Mindset. I actually think it’s related to the fear of death - some people like having new things around.

The rollover to me is the key. You have a loan and an asset of hopefully equal value. What actual happens in practice. I’ve no idea. Do they make you put down more cash to get the next new car or fudge it somehow ?


#5

The product is designed so at roll over you have enough equity in your old car to cover the deposit for your new car i.e. the guaranteed minimun value is 10k to 20k less than the estimated second hand value of the car.


#6

Here’s the bit I can’t get a straight answer to: You finish a PCP and hand back the car - do you now have to put another 10-30% up front to enter into the next PCP?


#7

you would only hand back the car if its worth less than the GMFV, if you do hand it back then the answer to your question is yes.


#8

In it’s most benign form PCP is just a way of financing depreciation. I don’t see the problem.

There are some suspiciously cheap deals where the monthly payments seem to be much lower than the depreciation, and I’ve always thought these were the double-whammy deposit+ballon payment sort where you end up without any equity at the end for the next car. But in that case you’ve just blown 5k or whatever of savings, which is hardly the end of the world. You’d then be demoted to bangernomics from which unlofty position you can contemplate your inability to do basic maths.


#9

So, as someone who only ever buys cars for cash, I just need to time my next purchase to coincide with when this all goes tits up and grab myself a secondhand bargain?


#10

what exactly does everyone think is going to happen that there will be some massive issue?

worst that happens to the buyer is that they have no equity at the end, worse that happens to the garage is that they have set the GMFV too high and they take a small loss when selling it on,

what else can happen?


#11

There won’t be anyone to sell it on to, in a tightening credit cycle.


#12

So? The garage or the finance company takes the hit.


#13

The tightening credit cycle (if it happens to any great extent) mostly affects new cars. There is always a cash market for nearly-new (3-5 y/o) cars because cars wear out and these have a good combination of reliability and cheapness. The values might take a bit of a hit, but they will shift.

It’ll be interesting to see the extent to which Brexit affects the UK-Ireland motor trade.

In the last crash a lot of dealers were left with debt servicing problems from overinvestment in premises combined with zero new car sales. A few PCP cars won’t be anything like as bad as that.

In any case, who takes the risk on a PCP deal? Is it the dealer, the distributor or the manufacturer?

edit: I dimly remember used prices going up after the last crash due to lack of supply. Did I imagine that?


#14

I remember that too, but it was a lagging effect by a couple of years IIRC. In 2012-14 a second hand 2010 reg car was hard to get and so more expensive relatively.


#15

exactly


#16

boards.ie/vbulletin/showthr … 2057829641


#17

PCP is actually a very clever way of getting around the ‘problem’ of a good product.
Probably because of competition and/or safety issues, it’s difficult to plan obsolescence into such a product.
Can see men in suits around a boardroom pondering ‘how do you get people to sell a product after 3 years when it’s good for another 17’ ?


#18

And the garages owe money to the banks, and the finance companies are the banks. And who takes the hit when the banks take a hit? - the taxpayer does. After all it was only the banks that were taking chances with mortgages in the last financial charade :nin


#19

Good luck to Volkswagen Bank getting a taxpayer bailout from Germany, if Paddy won’t pony up for the audi.


#20

Well that thread was an interesting way to waste an evening, but I understand PCP now. Lessons from the thread seem to be

  • Don’t go near BMWs. The dealers don’t give any or much equity at the back end
  • PCP suits brands like VW that have strong residuals and are hungry to do deals
  • Shop around at the beginning AND at the end. Although you don’t own the car until the balloon payment, you can trade it in to any dealer who gives you best price
  • it’s all about “cost to change”. Typically the first PCP they’re putting in a 30% deposit but at the back end their equity (trade in price actually offered minus balloon payment) is only 15% of the value. There’s always cash required for the second PCP. For a good PCP brand like VW the cash can be low €2.5k to stay in a similar value car to what you’re in. Sometimes it’s more cash than they want. The first example doesn’t understand that the 7.5k extra cash for the second PCP is really because he’s moving from a Passat that he has done big miles in to a better spec Tiguan.

To answer this thread title - I don’t see a ticking time bomb. Unless of course Paddy is borrowing for his “equity”, which Paddy has a bad habit of doing before :stuck_out_tongue:
As long as the initial deposit and all following cash top ups for succeeding PCPs aren’t borrowed from somewhere then all is ok.