Belfast Telegraph

View from Dublin: Demand for new cars driven by credit... but is road ahead bumpy?

By Richard Curran

Attainable is the new buzz word in motor advertising. "Driving away in the Audi of your dreams is even more attainable with enhanced flexible plans to suit your needs", is how the Audi literature puts it.

Over at Mercedes Benz, it is about dreaming of owning a Mercedes Benz one day, and "one day is now".

The sheer luxury of driving around in a new car is pretty appealing. Drive any road in Ireland and the number of new cars is quite staggering. However, if your neighbours are pulling up in a brand new car, there is a very strong chance they have financed the purchase on a personal contract plan (PCP).

This is the financial instrument that is making so many of these new cars "attainable", and estimates suggest that 60% to 70% of new car sales in Ireland are being financed through PCPs.

The reason is they involve making substantially lower monthly repayments than in a standard car loan or hire purchase agreement. They do require a deposit, usually of 10% to 30% of the purchase price. If after three years you don't want to keep the car you can hand it in and 'buy' a new one. The deposit needed for the new one, in theory, should be derived from the difference between the guaranteed price the car dealer will pay for the car and the amount you still owe.

If you want to, you can just hand in the keys after three years and walk away, assuming you have kept to the terms of the deal around the condition of the car and how many miles you have done per year.

The PCP is an ingenious financial product. "Your Audi journey begins with PCP finance" is how Audi puts it, while Mercedes says, "one day is now, with PCP across the range".

But there are potential problems which may well be coming down the track. What if so many new cars are sold on PCPs that the second-hand car market gets flooded with second-hand cars, as people keep opting for new ones?

The downside would be shared by both the lender of the money and the customer.

The risk for the lender is that they have set a guaranteed minimum future value for the car, three years in advance.

A flooded second-hand market could reduce the market value, which would hit the lender.

For the customer, these risks are a lot less. The lender will take the hit if the car isn't worth what they thought it would be worth, but the customer may find they don't have enough equity left in the car to use as a deposit to go again and get another one. The lower the deposit, the greater the monthly repayments will be on their next car.

This isn't so much a direct financial hit for the consumer as an adjustment they might have to make to the plan on their next car.

And second-hand car prices have begun to fall, largely prompted by an influx of tens of thousands of cars from the UK, aided by cheaper sterling after the Brexit vote. PCPs have been a key driver in new car sales in Ireland. Banks are lending for them. So too are the car companies themselves through their financial arms.

Volkswagen Bank lent out €340m (£300m) in the first seven months of 2016, which was equivalent to what it lent out in all of 2015. The average amount being lent also appears to have risen, with BMW saying its average PCP loan in 2015 was €27,000 (£24,000) but last year it was up to €30,000 (£26,000).

However, as growth in new car sales began to slow, some manufacturers are reducing their prices. Internationally, Volkswagen Bank has lent out €100bn (£88bn) to its customers.

In the UK some economists and some industry figures are getting concerned about the impact of PCPs on the lenders and the risks for them. The real danger is that second-hand car values will fall dramatically. In the UK, a used car that is less than two-and-a-half years old is worth 57.6% of its original value on average. This is down from 61.1% in 2014. The scale of motor credit in the UK has garnered attention from the Bank of England.

Belfast Telegraph

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