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Your Money: Car finance could lead to debt shock

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Much of the of Covid-related financial hardship has, quite rightly, focused on mortgages and small business loans.

But there’s another category of borrowing out there which gets little or no mention, may in fact become the bug-bear of the recession to come car finance.

Unlike bank or credit union loans, car finance in the form of Personal Contract Plans (PCPs) is not regulated in the same way, by the Central Bank.Indeed, up until very recently nobody had any idea how many motorists or how much in indebtedness there was.

his time last year figures show 76,153 loans amounting to almost €1.5 in outstanding debt, from a mix of (mainly) Irish and foreign banks. Loans are typically financed over three yearsand the average is around €15,000.

About 30,000 PCPs aretaken out every year, compared to just 400 in 2012 and are, according to the Central Bank,“the current driver of growth in bank-related lending to Irish households for non-mortgage purposes”, accounting for 39pc of all carrelated debt by 2017, up from just 15pc three years earlier.

Labour TD Sean Sherlock raised a flag in the last weekabout the impactCovid19 haveon these loans, calling the amounts involved ‘staggering’, and querying the lack of protocol and protections in place should borrowers fall into financial difficulty.

Unlike a personal bank loan, PCP is secured finance; in other words, fail to pay and you won’t just be hounded for the money, but the car can be taken off you. This is why garages charge such low (or no) interest; they can’t lose. A bank or credit union factorsin a of defaulters withunsecured loans, and charge more as a result.

They come after you for what they’re owed, but can’t lift the car in lieu.

I’ve written about PCPs beforeand often get a slew of negative responses from both customers and the motor industry. So, set things straight

There is absolutely noing wrong with a PCP. You get a shiny new car from a reputable dealer with cheap financeprovided for very little by a known, trusted bank.

You only pay a third of the price over 3 years with the balance funded by your initial deposit or trade-inand a balloon payment at the endhe temptation to not pay this and simply rollthe loan can be enticing and so this is what usually happens. Most people don’t save up in a parallel manner for the balloon in order to buy the car outright at the end of contract.

As long you can continue the payments, you get to continue leasing the car. You’ll never own it, but maybe you’re okay with that. Don’t lose your jobor miss a payment you get that nice leather smell and an envious neighbour.

Covid is likely to bring the sharpest shock to our economic system and people’s lives since the financial crash of 2007some commentators say it could even be worse. Add in Brexit and the flush of cheap imports since Sterling fellafter the 2016 vote, and suddenly, PCP doesn’t look like the rosiest picture.

But I could be accused of not understanding. I’ve no particular interest in cars and as a depreciating asset, think it’s barmy to borrow for one.I prefer the old fashioned method of saving up and buying second hand every five years or so.

But I get the draw. With 117,000 new car sales in 2019 it ticks a lot of boxes forpeople and most of them can’twrite a cheque for their heart’s desire. Borrowing is cheap, easy and fast.

So I can’t say they’re not a good deal, but they do require care and investigation .

Andif it is the case that anytime in the next few yearsits possible you might find yourself unable to continue the payments, then perhaps a regular loan and the second-hand lot is a safer route.

But don’t take my word for it: a study from the Central Bank found consumers confused and bewildered by PCP contracts and warned that negative equity (remember that?) could be a serious problem postBrexit. Michael McGrath it a ‘glaring hole’ in consumer protection.

HP

An alternative is hire purchase. This differs from PCP in that you pay for the full value of the car over the term. It generally requires a higher upfront deposit, say 20pc, but you can pay over 35 years and the car is yours afterward.

For example. Ford offers both PCP and HPThe former has a 1030pc initial deposit requirement, the latter a minimum 20pc. BMW, Volkswagen, Renault and others also offer options on this. See the panel for a comparison.

Additional Costs

Expect to pay ‘documentation’ fees which ofabout €150. There will be limits laid down on the maximum mileage you can do each year (15,000– 20,000km) with a hefty addon charge if you go over this. In addition, you’ll be expected to upkeep the servicing throughout and maintain a car free of damage, apart from normal wear and tear.

Shortcuts – Comparing those car finance deals

Comparisons example: Toyota Corolla 1.8 Luna Hybrid On the road price: €28,300.

Toyota finance gives buyers the option of placing a deposit between 10pc – 30pc of the car price upfront. For comparison purposes, a 30pc deposit has been used.The remainder is financed over 36 months, with a balloon payment (known as the Guaranteed Minimum Future Value)either paid in a lump sum, or the car sold to provide the deposit for another PCP plan.

The Figures: PCP

30pc deposit (€8,520) + initial payment €332.79 + 35 payments €269.30 + final payment of €12,298.50. Based on max 15,000 km p.a.

Interest rate 4.75pc p.a.

Total cost of car: €30,576.79

Buyer has the option of returning or buying the car or renewing the contract after 37 months, sundry admin fees are included.

The Comparison: HP

30pc deposit (€8,520) + 36 payments €614.69, no final payment.

Interest rate 8pc p.a.Total Cost: €30,775.82, no mileage limit.

The Alternative: Car Loan, KBC

30pc deposit (€8,520) + 36 payments €603.78, no final payment.

Interest rate 6.3pc p.a.

Total Cost: €30,256.15, no mileage limit.

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