Irish consumers struggle to understand PCP car finance

Irish consumers do not understand important aspects of Personal Contract Purchase (PCP) plans, according to new research undertaken by the ESRI’s Behavioural Research Unit. The study, conducted in collaboration with the Competition & Consumer Protection Commission (CCPC), suggests that while PCP deals have become a popular form of car finance, many consumers’ grasp of these products is poor.

PCP deals usually have lower monthly payments than hire purchase agreements or loans, increasing affordability. But they also have more complex financial arrangements and conditions. The ESRI team undertook an experiment with a representative sample of consumers. The participants were given information about PCPs typically given to car buyers. They were then tested to see if they could judge PCP offers accurately and if they understood the key features. The findings raise concerns about consumer protection.

The participants found it harder to choose consistently between PCP deals than hire purchase deals. When rating adverts, they often rated inferior PCP deals to be better value than superior ones. The tests demonstrated a clear lack of understanding. Almost one quarter of the consumers performed no better than chance on multiple choice questions that tested whether they had absorbed the central facts about how PCPs work. All the participants made some mistakes.

These results imply that many car buyers are unlikely to grasp important aspects of these large financial transactions. Of particular concern is consumers’ understanding of what happens at the end of the deal. Car buyers who take out PCP finance may be surprised to discover that after putting down a deposit, making three years of monthly payments, caring for the vehicle and staying within agreed mileage limits, they end up owning little or no asset in return.

ESRI researcher, Terry McElvaney, who led the study said: “The findings of this experiment suggest that PCP deals should be considered complex financial products. Given that buying a car is the second biggest financial transaction most people undertake, it is vital that consumers entering these deals know what they consist of and what they are getting into.”

More encouragingly, the study found that participants’ comprehension improved significantly following the provision of independent advice and diagrams explaining how PCP deals work. Nevertheless, stronger regulation of these complex products may be required, with a particular focus on the information given to car buyers at the point of sale. The study has already been used to improve the advice about PCPs available to consumers on