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 Post subject: PCP Car Finance - A ticking time bomb
PostPosted: Fri Nov 09, 2018 1:11 pm 
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The Central Bank are now tracking PCP car loan data and found that at end-June 2018 there was outstanding bank lending for PCPs of €1.243 billion from 69,668 contracts

You can find the latest figures in table A.19 in 2nd tab (Table A.19 - Outstanding)
https://www.centralbank.ie/statistics/d ... heets-data

I make the June 2018 average loan as €17,842 (1.243bn / 69,668)

Some recent reports have been conducted into the use of PCP


An Overview of the Irish PCP Market (Revised Data)

by Central Bank, March 2018 data revised in September 2018

https://www.centralbank.ie/docs/default-source/publications/economic-letters/vol-2018-no.2---an-overview-of-the-irish-pcp-market-(sherman-heffernan-and-cullen)-revised-september-2018.pdf?sfvrsn=6

Review of Regulation of Personal Contract Plans

report by Michael Tutty, a former secretary general of the Department of Finance, September 2018

https://www.finance.gov.ie/wp-content/u ... -final.pdf

Personal Contract Plans: the Irish Market

https://www.ccpc.ie/business/research/m ... sh-market/

report by CCPC, March 2018


There are obvious risks here for loose lending practices.

Tutty finds they are in legal limbo as
Quote:
There is no specific legislation dealing with PCPs. In the absence of a legislative definition, it is generally assumed that they are covered by the hire-purchase legislation set out in Part VI of the CCA 1995


He also finds the CB are under declaring the true figure for PCP as they are only collecting stats from

Quote:
financial institutions authorised by or registered with the Central Bank, not from the wider group of PCP providers covered in their earlier survey. They should collect statistics from as wide a base as they can, even if this is on a voluntary rather than a statutory basis.


This is potentially misleading as the media are now reporting the new, smaller figure as the true figure even though we know they reduced their survey population per above

https://www.irishtimes.com/business/tra ... -1.3628052

Quote:
In March, the regulator warned of “increased indebtedness” of consumers who sign PCPs, as well as the banking system’s exposure to the car market with the scheme becoming the go-to source for finance in the Irish market.

At the time the Central Bank found there were 126,249 outstanding PCP contracts but on Thursday it revised that figure down by almost 50,000 contracts to 76,582.


For me, the ticking time bomb is because of how PCP car loans are structured. You pay 10-30% up front, low months repayments over 36 months, with a lump sum required at the end. I believe many people never pay this lump sum and instead roll the loan forward to their next new car. To my minds it's almost like a Ponzi scheme where they will never fully repay the lender...

But when the next recession hits, what happens when the lender wants their money back?


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Fri Nov 09, 2018 1:24 pm 
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Posts: 294
TheJackal wrote:
But when the next recession hits, what happens when the lender wants their money back?



Nama on wheels. 'You can't drag me kicking and screaming out of the 'family car''. Actually they already had a term for that, didn't even have to invent one.


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Sat Nov 10, 2018 12:03 am 
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Epicurus wrote:
TheJackal wrote:
But when the next recession hits, what happens when the lender wants their money back?

Nama on wheels. 'You can't drag me kicking and screaming out of the 'family car''. Actually they already had a term for that, didn't even have to invent one.

Unlikely. PCP is a type of hire purchase. I can't see any court upholding your right to keep a car you only hired. No, the risk will be for the car retailers, getting all those second hand cars back that there is no market for.

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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Sat Nov 10, 2018 1:06 am 
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TheJackal wrote:
The Central Bank are now tracking PCP car loan data and found that at end-June 2018 there was outstanding bank lending for PCPs of €1.243 billion from 69,668 contracts

You can find the latest figures in table A.19 in 2nd tab (Table A.19 - Outstanding)
https://www.centralbank.ie/statistics/d ... heets-data

I make the June 2018 average loan as €17,842 (1.243bn / 69,668)

Some recent reports have been conducted into the use of PCP


An Overview of the Irish PCP Market (Revised Data)

by Central Bank, March 2018 data revised in September 2018

https://www.centralbank.ie/docs/default-source/publications/economic-letters/vol-2018-no.2---an-overview-of-the-irish-pcp-market-(sherman-heffernan-and-cullen)-revised-september-2018.pdf?sfvrsn=6

Review of Regulation of Personal Contract Plans

report by Michael Tutty, a former secretary general of the Department of Finance, September 2018

https://www.finance.gov.ie/wp-content/u ... -final.pdf

Personal Contract Plans: the Irish Market

https://www.ccpc.ie/business/research/m ... sh-market/

report by CCPC, March 2018


There are obvious risks here for loose lending practices.

Tutty finds they are in legal limbo as
Quote:
There is no specific legislation dealing with PCPs. In the absence of a legislative definition, it is generally assumed that they are covered by the hire-purchase legislation set out in Part VI of the CCA 1995


He also finds the CB are under declaring the true figure for PCP as they are only collecting stats from

Quote:
financial institutions authorised by or registered with the Central Bank, not from the wider group of PCP providers covered in their earlier survey. They should collect statistics from as wide a base as they can, even if this is on a voluntary rather than a statutory basis.


This is potentially misleading as the media are now reporting the new, smaller figure as the true figure even though we know they reduced their survey population per above

https://www.irishtimes.com/business/tra ... -1.3628052

Quote:
In March, the regulator warned of “increased indebtedness” of consumers who sign PCPs, as well as the banking system’s exposure to the car market with the scheme becoming the go-to source for finance in the Irish market.

At the time the Central Bank found there were 126,249 outstanding PCP contracts but on Thursday it revised that figure down by almost 50,000 contracts to 76,582.


For me, the ticking time bomb is because of how PCP car loans are structured. You pay 10-30% up front, low months repayments over 36 months, with a lump sum required at the end. I believe many people never pay this lump sum and instead roll the loan forward to their next new car. To my minds it's almost like a Ponzi scheme where they will never fully repay the lender...

But when the next recession hits, what happens when the lender wants their money back?


If God was to ever invent a financial product suited to the Irish mindset it would be PCP car finance. It appeals to the pikey 'I'm doing well for myself, I've a new car don't I ?' Mindset. I actually think it's related to the fear of death - some people like having new things around.

The rollover to me is the key. You have a loan and an asset of hopefully equal value. What actual happens in practice. I've no idea. Do they make you put down more cash to get the next new car or fudge it somehow ?


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Sat Nov 10, 2018 4:21 pm 
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The product is designed so at roll over you have enough equity in your old car to cover the deposit for your new car i.e. the guaranteed minimun value is 10k to 20k less than the estimated second hand value of the car.


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 8:53 am 
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TheJackal wrote:
...You pay 10-30% up front, low months repayments over 36 months, with a lump sum required at the end. I believe many people never pay this lump sum and instead roll the loan forward to their next new car. To my minds it's almost like a Ponzi scheme where they will never fully repay the lender...


Here's the bit I can't get a straight answer to: You finish a PCP and hand back the car - do you now have to put another 10-30% up front to enter into the next PCP?


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 10:34 am 
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you would only hand back the car if its worth less than the GMFV, if you do hand it back then the answer to your question is yes.


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 11:26 am 
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In it's most benign form PCP is just a way of financing depreciation. I don't see the problem.

There are some suspiciously cheap deals where the monthly payments seem to be much lower than the depreciation, and I've always thought these were the double-whammy deposit+ballon payment sort where you end up without any equity at the end for the next car. But in that case you've just blown 5k or whatever of savings, which is hardly the end of the world. You'd then be demoted to bangernomics from which unlofty position you can contemplate your inability to do basic maths.

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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 11:27 am 
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ps200306 wrote:
No, the risk will be for the car retailers, getting all those second hand cars back that there is no market for.

So, as someone who only ever buys cars for cash, I just need to time my next purchase to coincide with when this all goes tits up and grab myself a secondhand bargain?

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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 11:28 am 
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what exactly does everyone think is going to happen that there will be some massive issue?

worst that happens to the buyer is that they have no equity at the end, worse that happens to the garage is that they have set the GMFV too high and they take a small loss when selling it on,

what else can happen?


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 1:32 pm 
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cyrusir wrote:
what exactly does everyone think is going to happen that there will be some massive issue?

worst that happens to the buyer is that they have no equity at the end, worse that happens to the garage is that they have set the GMFV too high and they take a small loss when selling it on,

what else can happen?


There won't be anyone to sell it on to, in a tightening credit cycle.


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 1:34 pm 
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owenm wrote:
cyrusir wrote:
what exactly does everyone think is going to happen that there will be some massive issue?

worst that happens to the buyer is that they have no equity at the end, worse that happens to the garage is that they have set the GMFV too high and they take a small loss when selling it on,

what else can happen?


There won't be anyone to sell it on to, in a tightening credit cycle.

So? The garage or the finance company takes the hit.


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 1:39 pm 
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owenm wrote:
There won't be anyone to sell it on to, in a tightening credit cycle.

The tightening credit cycle (if it happens to any great extent) mostly affects new cars. There is always a cash market for nearly-new (3-5 y/o) cars because cars wear out and these have a good combination of reliability and cheapness. The values might take a bit of a hit, but they will shift.

It'll be interesting to see the extent to which Brexit affects the UK-Ireland motor trade.

In the last crash a lot of dealers were left with debt servicing problems from overinvestment in premises combined with zero new car sales. A few PCP cars won't be anything like as bad as that.

In any case, who takes the risk on a PCP deal? Is it the dealer, the distributor or the manufacturer?

edit: I dimly remember used prices going up after the last crash due to lack of supply. Did I imagine that?

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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 4:34 pm 
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Eschatologist wrote:

edit: I dimly remember used prices going up after the last crash due to lack of supply. Did I imagine that?


I remember that too, but it was a lagging effect by a couple of years IIRC. In 2012-14 a second hand 2010 reg car was hard to get and so more expensive relatively.


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 Post subject: Re: PCP Car Finance - A ticking time bomb
PostPosted: Mon Nov 12, 2018 5:02 pm 
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Joined: Mar 30, 2016
Posts: 674
Luan wrote:
owenm wrote:
cyrusir wrote:
what exactly does everyone think is going to happen that there will be some massive issue?

worst that happens to the buyer is that they have no equity at the end, worse that happens to the garage is that they have set the GMFV too high and they take a small loss when selling it on,

what else can happen?


There won't be anyone to sell it on to, in a tightening credit cycle.

So? The garage or the finance company takes the hit.


exactly


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