Personal contract plan car finance ‘can cope’
Bank of Ireland, Ireland’s biggest car finance company, has said the personal contract plan model remains strong despite concerns about its security due to falling secondhand car prices.
The potential exposure for Irish banks in the €1.5bn personal contract plan car market as well as consumers and car dealers was outlined recently by Central Bank economists, who said negative equity may be of particular concern in the Irish market.
It was a potential issue given the post-Brexit fall in the value of sterling which has seen an increase in cheaper used car imports, the report said — potentially reducing the prices of used cars in the future and pushing existing personal contract plan contracts towards negative equity.
The situation has been exacerbated by a slump in new car sales in the UK in March, which traditionally is their strongest month.
Demand for new diesel cars in the UK nosedived by more than a third in March, pushing down registrations almost 16% in a further blow to the segment which faces levies and bans worldwide.
Irish motorists have been taking advantage of the fall in prices of UK cars, with used car imports up 9.5% in the first quarter, according to the Society of the Irish Motor Industry (SIMI). So as cheaper UK cars are imported, the value of secondhand cars drops and a personal contract plan car is worth less than anticipated after the three-year arrangement between dealer and customer is up.
Personal contract plans are a form of hire purchase where the consumer typically pays a deposit up to 30% and makes regular monthly payments, usually for three years, before being presented with options such as handing the car back to the dealer, paying off a last so-called balloon payment to own the car outright, or paying a new deposit and beginning another contract.
Guaranteed future values are offered to the customer at the beginning of the contract, and is invariably the amount a customer will pay as the final balloon payment. However, because of the uncertainty of the market, that figure could end up significantly higher than the car is worth. Central Bank figures showed there were 126,249 personal contract plan agreements worth €1.5bn — that is up from around 14,000 six years ago. The average value of contracts rose from around €15,000 to over €23,000.
Bank of Ireland has arranged most personal contract plans, with major brands such as Ford, Toyota, Opel, Hyundai, and Kia all using the bank.
A spokeswoman for Bank of Ireland said: “Our personal contract plan book is performing well and has continuously extremely low arrears.
“Bank of Ireland is satisfied that its approach in conjunction with its motor industry partners to the setting of guaranteed future values is prudent enough to cope with market trends.”
She said the setting of values is kept under review.
SIMI director general Alan Nolan said Brexit had compelled dealers to factor in a slump in sales, saying firms would have to be “cavalier” not to do so.
The slump in diesel sales was not being seen in Ireland, he said.
The Competition and Consumer Protection Commission has recommended personal contract plan agreements fall within the Central Bank’s Consumer Protection Code.
