PCP Finance – Motor Industry Saviour or “Auto Loan ABS” Bubble?
In this article, Andrew Byrne, a director in Deloitte Ireland’s Corporate Finance team explores PCP finance.
PCP (Personal Contract Purchase) finance might just have been the Car industry’s saviour following the global economic crash, PCP plans offer motorists much easier access to finance a new car.
A car buyer agrees to pay a minimum deposit upfront (usually between 0% & 30% value of the vehicle), the buyer then agrees with the dealer the level of monthly instalments, usually lasting for 36 to 48 months (in the US some have been extended out to 84 months). Then the buyer is advised of the Guaranteed Future Value (GFV) of the vehicle at the end of the agreement (see below).
The GFV is dependent upon your sticking to the agreement which may refer to matters such as keeping the car in good order, regular servicing, maximum mileage etc.
At the end of the PCP period you then have three options:
- Return the car and walk away
- Pay the amount of the GFV and own the car or
- Utilise the GFV to part exchange for a new car and start the process again.
There are advantages and disadvantages to each of the above options so you really need to decide what your needs and requirements are before choosing your option.
The GFV is calculated by the finance provider who runs its modelling programme to estimate the future value of the car at the end of the term, it builds in the risk factor, delinquencies, motor trends etc. and also ensures that the GFV will provide enough equity for the user so they may use the equity as the deposit for the next PCP.
In Ireland PCP plans are especially popular with VW indicating that it accounts for over 50% of new car sales throughout their range of offerings (VW, Audi, Skoda & SEAT).
One reason for that popularity is that VW who operate their own bank can offer very low interest rates when compared to many other manufacturers who offer finance in conjunction with Irish Banks.
Another significant effect on the PCP offering is that customers are likely to show loyalty to the brand if using the GFV to part exchange.
When a promotion is run by VW for example on a Skoda Octavia, VW have already agreed a deal with the factory making the vehicles for say 400 Octavia’s for the Irish Market built to a specific specification and therefore they can agree and obtain a significant discount on the cost price for placing such an order, these savings then allow VW Bank to sell the PCP finance for the vehicles at 0% making it very attractive for us the motorist.
“The uncertainty of a vehicle’s residual value represents a major risk for creditors of a financing contract, primarily when obligors opt to terminate their contracts voluntarily in the end or end of the term.“