ESRI: Do consumers understand PCP car finance?

[Brendan Burgess]

Do consumers understand PCP car finance? An experimental investigation

Today, 30 August, the ESRI published Do consumers understand PCP car finance? An experimental investigation.

The research studies how well consumers understand Personal Contract Purchase (PCP) plans. These plans offer lower monthly payments than hire purchase agreements or loans. But they also have more complex financial arrangements and conditions.

The report finds that Irish consumers do not understand important aspects of PCP plans. Consumers have difficulty telling the difference between good and poor PCP deals, or understanding what happens at the end of the deal.

Research Bulletin

Download Do consumers understand PCP car finance? An experimental investigation by Terry McElvaney (ESRI), Pete Lunn (ESRI) and Féidhlim McGowan (ESRI).

Journal Article

Download Do consumers understand PCP car finance? An experimental investigation by Terry McElvaney (ESRI), Pete Lunn (ESRI) and Féidhlim McGowan (ESRI). (Subscription costs €42.99)

Press Release

Read the accompanying press release, which highlights key findings from the publication.

For further information, please contact:


Pete Lunn, Associate Research Professor, pete.lunn@esri.ie

 

[Brendan Burgess]

RESULTS
Consumers made significantly more inconsistent decisions when choosing
between pairs of PCP deals than when choosing between pairs of more traditional
Hire Purchase deals. When rating PCP offers, almost one quarter of the time,
consumers judged an inferior deal to be better than another that was objectively
superior. Perhaps most striking was performance on the multiple-choice questions.
Comprehension of the central facts and concepts surrounding PCP deals was poor,
with 23 of the 100 participants performing no better than chance. This was despite
rewards for good responses and the fact that more than half of the sample were
educated to degree level.


Encouragingly, however, errors reduced significantly after participants read the
independent advice. Ratings became more accurate and answers to
comprehension questions improved, especially among the group that received the
advice that contained an explanatory diagram.

 

[Brendan Burgess]

What does this mean?

"However, PCP plans are relatively complex and involve potential drawbacks that may not be properly understood by consumers. For instance, they involve some risk, because a consumer’s financial position at the end of the deal depends on prices in the second hand car market."

If I intend to pay the MV and buy the car after three years, then there is no risk - I know exactly what I will be paying for it.

If I intend to hand it back, there is no risk either?

Have they not the same or less risk than buying a car with a car loan?

If I buy a car for cash or with a loan, I might regret it after three years as the second hand market may make it worth less.

Brendan

 

[Andy836]

What does this mean?

"For instance, they involve some risk, because a consumer’s financial position at the
end of the deal depends on prices in the second hand car market."

If I intend to pay the MV and buy the car after three years, then there is no risk - I know exactly what I will be paying for it.

If I intend to hand it back, there is no risk either?

Have they not the same or less risk than buying a car with a car loan?

If I buy a car for cash or with a loan, I might regret it after three years as the second hand market may make it worth less.

Brendan

That's correct Brendan. It's a bizzare comment. They're not the only one. Many media commentators including personal finance journalists make the same comment i.e. "if used car prices go down, then the consumer mightn't have much/any equity in the PCP car to roll into a new PCP contract".

In fact the risk is minimized. If you bought the car your risk of loss is higher as you've no minimum guaranteed repurchase price.

 

[RedOnion]

In my view, the reason for this perceived risk is a complete misunderstanding / mis-selling of PCP.
People buy into the idea they can have a new car every 3 years. If the market value of the car isn't higher than the GMFV of the PCP contract, then they've no deposit to get a new car. But that's not a risk - that's reality. Regardless of the finance method.

 

[newtothis]

In fact the risk is minimized. If you bought the car your risk of loss is higher as you've no minimum guaranteed repurchase price.

It's bizarre OK. Personally, I think they're a great idea: anything that transfers the risk (of prices collapsing in the future) to someone else (the dealer, who's committed to a future purchase at a specified price) sounds like a good idea to me.