Credit Union Car Loan v’s PCP


We’ve been hearing politicians spout that we’re finally “turning the corner” of recession. Well, while many families have yet to feel it, thousands have decided to do so literally … in a new car.

With low interest Personal Contract Plans (PCPs) being pushed by every motor manufacturer, and shiny models in large glass showrooms, the lure of new car can be hard to resist.

New car sales are up 17.5% on 2015, with 146,672 new registration plates being fitted, the highest year for sales since 2008. While garages are notoriously secretive about the number of new cars sold via PCP, there is no doubt these contracts are on the increase. Headline interest rates of under 5% are very attractive, and people are sick and tired of their old pre-boom banger. They can afford the repayments and it’s nice having the neighbours swoon at your 171 reg in the driveway. In the more established UK market, 70% of all new cars are sold via PCP. But as your mother used to say, ‘just cos everyone else is doing doesn’t mean that you should too’.

Every action has a consequence, and in the case of PCPs, it’s both personal and societal.

PCPs operate like a regular loan or hire purchase contract with the asset (the car) being held as security until the final payment is made. But whereas a personal loan, say with the credit union, might cost 6 – 9%p.a. in interest, PCP rates can vary from 0% to up to 10% depending on which model the manufacture wants you to buy. While we’re often tempted to focus solely on the monthly repayment or even the interest, it’s imperative to look at the ‘total cost of credit’ because this is the actual amount you are being charged for the PCP or loan, and remember that lower repayments can be accompanied with a higher cost of credit.

So, what’s the catch?

Well it’s in the structure of the plan.

PCPs usually have a hefty upfront deposit – anything from 10 to 50%. It can, of course, be part trade-in, but you will never get finance on the whole loan.

Secondly, repayments are over a short term, typically three years. Your mileage will often be capped (typically at 15,000 km p.a.), to ensure the car keeps its value and you’ll have to adhere to manufacturer servicing contracts. Interestingly, the average Irish private motorist with a petrol car drives 17,000 kilometres per year, with diesel car users clocking up 24,000 kilometres. So there appears to be a considerable number of people that may face unexpected extra charges at the end of the 3-year PCP deal. And just like a rental car on holidays, they’ll check the car when you return it to ensure that it’s still in good condition when you bring it back. Do you really mind your car that well?

Then, there’s the balloon payment at the end which can amount to 35% of the price.  This is called the ‘Guaranteed Minimum Future Value’ (GMFV), and is set out at the start of the contract. It’s the ‘final payment’ which the garage will look for before you can finally own the car, or you can use it to ‘roll over’ the loan into a brand-new car, meaning you’re always leasing, never owning. And you will have to come up with a deposit unless the garage allows you a higher trade-in value, which seems less likely with the current fall in second-hand car prices.

It’s fine and dandy unless you can’t meet the repayments, say because you lose your job. In that case, unlike a credit union loan, the bank will repossess the car and sell it to pay down the loan. If they can’t sell it for enough, often at an auction, they will chase you for the balance.  A credit union will also look for its money back, but loans are typically unsecured, meaning they can’t take your car off you.

Several years ago, an Irish car finance company studied borrower behavior and found that while the typical buyer took out a 5-year loan, they were bored and looking to change after less than 2 and a half years. So, consider how long you typically keep your car and don’t assume it will be any different with the next one.

The societal impact of PCPs has another, looming problem:

Since the Brexit vote last June, car imports from the UK are up by over 40%. By September 2016 48,943 cars had been brought in from the UK with bargain hunters getting good deals on sterling. That caused a glut on the market, meaning that the cars now returning from PCP contracts (after their three years), are not holding their value. So, this could cause issues for those with PCP contracts coming to an end.

For the canny buyers who held back and who will typically use a car loan, they find themselves in a strong bargaining position, with so much choice available. Where will they go for their loans? Well, certainly not the garage –PCPs are generally only available for cars up to 2 years old. They will, or should, use their local credit union which has no qualms about lending the full amount for a pre-loved model. They’re wide open for all car purchases, whereas many garages are not.



Sinead is a Personal Finance and Consumer journalist with the Irish Independent and Herald newspapers. She also appears on RTE’s ‘Today with Sean O Rourke’ and Newstalk’s ‘Drive’programmes as consumer expert.