Podcast #42: PCP Finance...A Drug or A Car Finance Product?!

PCP ('Phencyclidine' - not sure how that is pronounced!) was introduced in the 1950's as an anesthetic but was shelved in the 60's due to it's potentially lethal hallucinogenic effects. It was this hallucinogenic effect that made it so popular with recreational drug users and they have been producing it under the title of 'Angel Dust' since! It's chocka with Ketamine and apparently is the bees-knees if that is your idea of fun!

Another PCP, Personal Finance Plans, are on the scene now! This and other forms of consumer borrowing have rocketed in recent years, with experts saying the access to these loans is driving the new-car sales figures hugely, almost to hallucinogenic levels!

New Car Sales Figures for 2016:

Ireland 150,000

UK 2.7million

USA 17.5million

We love cars here at Informed Decisions, we don't necessarily spend lots of money on them however! We did a blog and podcast a while back to shed light on the true cost of cars, this proved really popular with many of you. We don't mean to suggest we have anything against cars, nor PCP Finance, but we do believe we should all understand the impact of what we are doing, so lets do the same with PCP Finance.

Before all that please do pop over here to find out why we exist, what our purpose is and why we are Ireland's first Financial Planning & Money Podcast. If you are looking for info on how to save or invest, protect your income, replace it when you retire or how you spend it in the meantime then this site is a useful resource here in Ireland! Also, if you have any questions or comments we'd love to hear from you, just drop a message to us here.

What is PCP Finance?

In Ireland, all we see to care about is mortgages, any time we have mortgages mentioned in our blogs/podcasts they are always the most listened to and most downloaded episodes, we just can't get enough of that wonderful stuff!

As always on this site we try to take a different view of things in order to help make it more practical and accessible to all, so we are going to 'mortgagise' PCP finance to try and make sense of it all!

To achieve this we will deep-dive PCP Finance, we will replace PCP Finance with 'mortgage' and 'car' with 'house'! See how you like that!

How Does PCP Work?

Most people have a good sense of it at this stage but let's have a brief over-view before we look at the figures. If you are thinking of buying a new house you can do so via PCP contract in your local dealer (pardon the pun!!). You select your house, pay a deposit in the form of cash or a trade-in house. You agree to a certain monthly payment for a certain period of time, typically between 3 and 5 years. At this stage you also agree the Guaranteed Minimum Future Value (GMFV), which is the final and largest payment you need to make in order to own the car at the end. This figure is based on the mileage, condition and estimate the dealer puts on the future value of the car after the 3-5 years.

What Happens At The End of The PCP Contract?

If you want to actually own the house at the end of the contract you must pay the GMFV as well as any 'completion' fees that may exist on the contract (you don't own it until you pay this by the way!).

Another option at the end is to hand back the house and walk away (where you would be walking to is another issue). Be aware that if the house isn't in agreed condition and wear & tear as set out at beginning of the contact then you may be subject to more fees.

The 3rd option is to roll into another PCP contract. The deposit you paid on the first house is not carried into the next contract, that's been and gone! If the actual market value of the house at the end is greater than the GMFV then you may have some equity to put to the new house you are looking at.

So that's a 'mortgagised' view of PCP contracts here in Ireland. Fairly straight-forward and sounds pretty simple. And we must try to remember that that is exactly how the dealer wants you to perceive it, the simper the better as more of us are likely to buy the produce!

How do the Financials of PCP Finance work in Ireland?

If you google 'PCP Quote' the first search is the Competition & Consumer Protection Commission This is a crackingly useful (not sure that's a word!) site with lots of information for us consumers to inform ourselves, worth checking out.

The next few are car manufacturers offering you the option to quote yourself for PCP. Having done this it still seems pretty easy and straight-forward, as they want it to be!

Let's take an example of a Hyundai i40 Tourer. A decent car by all accounts. There is an 'Executive' version of this 'house' for just over €29k, this is the base model of this house, so why it's called executive is a wonder. Seems a reasonable buy though, decent mileage and service etc.

Based on the illustrations on their site (and the rest are similar btw!), if you have cash deposit or a house to the trade-in value of €10k then you could be 'eligible' to 'qualify' for their PCP package! Yeah, congratulations! You could select the 2 to 4 year package, let's say you opt for the 3 year package to try get it paid off sooner rather than later. So you are in the house and all for €10k. Not so bad......

Your payments will be fixed at approximately €300 per month, based on a rate of 5.9%. You decide that this, along with the mortgage and the child-minding and whatever other expenses you have, is just about manageable to you.

The GMFV agreed (based on doing no more than 15,000kms per year) is just over €11,000 in 3 years time. That is what the dealer is telling you it will be worth in 3 years time provided the wear & tear is average and that the mileage is as predicted.

If this really were a house you are agreeing to pay a deposit of 30%, then agree to pay 6% interest on the repayments, which are over 3 years, and that the value of the house is going to fall from €29,000 to €11,000 in that 3 years, at which point you will then exercise one of the three options outlined above......really!!!??

You can the pay the €11,000 to own the house You can hand back the keys and walk away (provided it is in good nick). Or, you can trade it in against another house and pop some more PCP into you!

And therein lies the nugget here. PCP really is a bit like the drug in that once we get on it we may find it hard to get off it! What it does do is help us to really easily hallucinate and forget about the depreciation we are paying over the term. That amounts to €20,000 in this example, over 3 years.

If it was a house we just wouldn't buy it, PCP or no PCP! Who buys a large asset which will cost you €20,000 over a 3 years period, in depreciation alone!? It seems that lots of us do, that lots of us see the simplicity, see the easily manageable monthly payments, see the easily achievable max mileage and forget about the largest yet least obvious cost. Stop hallucinating!

Is PCP an illegal or unethical product? We don't think so, but we do think you need to know what they hell you are doing!

But hey, that is what makes the area of our behaviours, biases and what some would call our predictable irrationality around money so interesting!! You have the information now, what will you do with it?

Please share this article and check out the podcast while you're at it!

Thanks so much for listening. You're a legend.

Paddy Delaney

QFA | RPA | APA