Is the PCP - Personal Contract Plan - credit bubble going to burst?

robut

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Every so often on and off I keep an eye on media for any updates on the world of PCP - Personal Contract Plans. These newer kind of rolling car loans that have become hugely popular.

Last year I was talking to a major Mazda dealer owner. He said 80% of all his sales were via PCP. Someone coming in with trade in / cash was as rare as hens teath these days.

Just spotted this from a credit union website fishing for business:

Letterkenny Credit Union can help you with PCP payments - Donegal News

2017 is set to be a bumper year for car sales with 45% of Irish consumers intending on buying. It is also the year when a number of first round Personal Contract Plans (PCPs) are ending. Many will simply opt to roll-on their existing PCPs to finance the purchase of a new car. Others will face a final payment, known as a balloon payment, to buy out of the contract. Consumers considering rolling up should read all the small print, and they may find it’s time to burst that particular balloon.
==> It is also the year when a number of first round Personal Contract Plans (PCPs) are ending.

Charlie weston had some words on this in January:

Charlie Weston: PCP car finance deals could be a sub-prime mess all over again

But a key aspect of a PCP is the need for the car to retain its agreed value at the end of the three or five-year deal. A surge in cheap imports from the UK, due to sterling's Brexit-induced collapse, means many PCP deals may bomb out.

Also, the sheer volume of PCP deals being done at the moment means that there will be huge numbers of cars on the market when it is time to take out a new deal.

All this means that PCPs could be the next lending bubble, akin to that sub-prime crisis that hit in 2008.

.... Motor experts warn there is likely to be a glut of three-year-old cars as recent PCP deals mature.

This is likely to push values down, meaning many cars bought with PCPs will be below their guaranteed minimum future values.
I also think their is a show coming up about this on Newstalk next day or two ( I think i caught an add mentioning this )

So what are PIE Peeps thoughts on this? Nothing to be concerned about? OR PCPs are trouble waiting to happen?

Personally I would be very slow getting involved in these .. then thats just me, child of the 80s, save then buy when you can afford it :D
 
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robut

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From April 2016:

More new cars but warning issued amid fear of car finance bubble | Irish Examiner

Michael Rochford, the managing director of Motorcheck.ie, said: “The continuing rise in new car sales is great news for the motor trade and the economy in general.

“But we should be aware that prices in the used car market have risen in recent years due to the stock shortages created by the downturn. This has kept residual values high and made finance deals such as PCP more affordable. But 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 that the used car market will begin to see values start to slide over the coming years as a result of supply pressures being eased.”

The effects of this could be felt by the consumer as well as the car manufacturer or banks. “The consequence for the consumer is that their next PCP may not be as affordable due to reduced residual values,” he said.
We are hitting THAT TIME this year ( the 3 year deals expiring ). Could be interesting how this pans out ..
 

corporal punishment

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I was looking at an English bike magazine a while back and basically every bike currently in production is available on PCP. Even high price models you'd normally not be able to afford. The balloon payment is the problem as it's usually more than the value of the bike at the end of the stage payment period. You're basically buying something for more than you could sell it for or could buy in the second hand market. Madness.
 

brughahaha

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From April 2016:

More new cars but warning issued amid fear of car finance bubble | Irish Examiner



We are hitting THAT TIME this year ( the 3 year deals expiring ). Could be interesting how this pans out ..
Not sure what age you are but I can remember the late 90s and early 00's being offered pension mortgages , current account mortgages , paynothing shure wont the increasing value of your home wipe out your mortgage mortgages ................ Very very glad I went for a vanilla , pay my debt mortgage........

On the basis that most financial products are designed to screw even more money out of me i prefer simple old fashioned financial products

Anytime ive crunched PCPs , the mileage , the costs if you damage the car ....none of it makes sense to me ...... But then in few areas of life are people as stupidly flahulach as they are with cars
 

Burnout

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I have a life.
'It makes more sense for me to rent a car than pay sky-high Irish insurance premiums'Apart from insurance, the big saving is deprecation. A car covering 50,000km a year would easily fall in value by €2,500/€3,000 a year initially. And there is no NCT to worry about, no road tax - the list goes on.

Which explains why, for the equivalent of €60-a-week (plus fuel costs, of course) she doesn't see why she should bother going through the process of trying to get insurance quotes for a car of her own.

'It makes more sense for me to rent a car than pay sky-high Irish insurance premiums' - Independent.ie
 

robut

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Not really. The latest figures show that Irish households are actually paying down debt at the fastest rate in the entire European Union. Household debt fell by €900m in Q3 and the pay down rate is accelerating.
??? From Jan 24th 2017

Six in 10 Irish consumers pay household bills with credit, survey finds

Almost 60 per cent of Irish consumers are forced to dip into their overdrafts, use credit cards or borrow from friends to pay essential household bills, according to new research out today. ( I hit Pay wall :D )
 
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Henry94.

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Not sure what age you are but I can remember the late 90s and early 00's being offered pension mortgages , current account mortgages , paynothing shure wont the increasing value of your home wipe out your mortgage mortgages ................ Very very glad I went for a vanilla , pay my debt mortgage........

On the basis that most financial products are designed to screw even more money out of me i prefer simple old fashioned financial products

Anytime ive crunched PCPs , the mileage , the costs if you damage the car ....none of it makes sense to me ...... But then in few areas of life are people as stupidly flahulach as they are with cars
The endowment mortgage was the big scam back then. Interest only on the loan but buy a policy which would generate the money to pay off the cost of the property at the end. Except it didn't and people got screwed.
 

sadcitizen

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Well how big is the market? There wont be much of a burst if it's not very big. I can't see figures.

I can see that there are about 150k new cars registered per year, and around 70% of new cars are bought under PCP with the average price being around 30k. So that'd be around what...12 billion of loans for the years that PCP has existed, with probably some significant percentage of those people buying new cars under the same plan. I guess that's bubbley territory.
 

EUrJokingMeRight

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PCP - Dont do it.
 

Orbit v2

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The endowment mortgage was the big scam back then. Interest only on the loan but buy a policy which would generate the money to pay off the cost of the property at the end. Except it didn't and people got screwed.
I had one of them, but thankfully converted it into a "vanilla pay my debt mortgage" ...

I'm interested in these PCP car finance deals. I don't have one, and I wonder what the issue with them is. I suspect if the residual value is less than you were promised, maybe because you did more mileage, or damaged it some way, then you could be faced with a big bill, but it struck me if you are conservative and really want to change the motor every three years, then they're not a bad way to go....
 

robut

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I had one of them, but thankfully converted it into a "vanilla pay my debt mortgage" ...

I'm interested in these PCP car finance deals. I don't have one, and I wonder what the issue with them is. I suspect if the residual value is less than you were promised, maybe because you did more mileage, or damaged it some way, then you could be faced with a big bill, but it struck me if you are conservative and really want to change the motor every three years, then they're not a bad way to go....
Maybe an ans to your Q from Charlie Weston?

Charlie Weston: PCP car finance deals could be a sub-prime mess all over again

But a key aspect of a PCP is the need for the car to retain its agreed value at the end of the three or five-year deal. A surge in cheap imports from the UK, due to sterling's Brexit-induced collapse, means many PCP deals may bomb out.

Also, the sheer volume of PCP deals being done at the moment means that there will be huge numbers of cars on the market when it is time to take out a new deal.

All this means that PCPs could be the next lending bubble, akin to that sub-prime crisis that hit in 2008.

.... Motor experts warn there is likely to be a glut of three-year-old cars as recent PCP deals mature.

This is likely to push values down, meaning many cars bought with PCPs will be below their guaranteed minimum future values.
This year is the end of the 1st 3 year PCP period in Ireland ..
 

Watcher2

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Easy money and easy metal. No one reads the fine print. Disaster waiting to happen.
 

Mad as Fish

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This implosion has been flagged on P.ie several times before, not least by yours truly who pointed out quite a while ago that increased car sales were not necessarily the best sign of economic recovery as touted by the usual shills of two or three years ago. Give them their due, the shut the feck up about it after a while.
 

sadcitizen

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If my figure above is approximately correct, on the order of 12b, then that's a massive chunk of total household debt (about 8%) just from a couple of years of car buying. And it looks like the arrears rate on unsecured non-mortgage loans is about 10% last year.
 

Burnout

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Easy money and easy metal. No one reads the fine print. Disaster waiting to happen.
Some people in Kildare have had enough bad news today. Have job, have money, no worries, borrow away....Overnight things change big time and so many of us are totally car dependent...like myself living in the country you gotta have a reliable car.
 

Orbit v2

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Maybe an ans to your Q from Charlie Weston?

Charlie Weston: PCP car finance deals could be a sub-prime mess all over again



This year is the end of the 1st 3 year PCP period in Ireland ..
Yeah, it seems the sneaky thing is this suggestion that you should have enough equity from the guaranteed value to finance the deposit for the next three year cycle. So, while the value might be guaranteed, the deposit for the next cycle isn't, and you are locked into that dealer it seems. Not good. Otherwise I guess you have to find the money to make the balloon payment at the end.

I prefer to buy used cars. So, maybe the end of this 3 year term might see a lot of used cars available at good prices.
 

Mad as Fish

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It's worth pointing out that with a PCP you are not actually borrowing the money, merely renting it off the finance company so you can if fact return the car and walk away from the commitment at any time. Of course there will be a financial penalty (three months payments or something like that) but you are not loaded with debt. The finance companies are the people with the major headache as they then have to dispose of all these used cars by dumping them on the market which may well mean they don't recover the value they had assumed at the start of the contract.
 


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