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Central Bank of Ireland survey warns against rise in PCP-based car finance

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Central Bank of Ireland survey warns against rise in PCP-based car finance

An economic letter by the Central Bank of Ireland said the share of personal contract plans in Irish banks' car-related debt rose to 43% compared to 25% at end-2014.

Personal Contract Plans, or PCPs, allow consumers to own a car for a fixed period by paying the difference between its current value and expected future value, including an interest amount. Consumers can choose to pay a lump sum at the end of the tenure to keep the car.

Such contracts are at risk of negative equity, according to the letter written by the central bank's Martina Sherman, Tiernan Heffernan and Bryan Cullen. This was because a decline in the value of the pound had spurred a rise in the import of cheaper, foreign used cars, they said.

The number of PCPs in Ireland at end-2017 numbered 126,249, valued at €1.5 billion, with 35,000 such contracts written annually, compared to end-2012 figures of 14,000 PCPs, with an average of 6,000 PCPs written annually.

Meanwhile, the average value of PCPs increased to more than €23,000 from €15,000, the letter stated, citing a survey conducted by the central bank's statistics division.

One in nine such contracts is offered by nonbank entities, while most contracts are offered by Irish resident banks.

The letter identifies four areas of concern related to PCPs: incentives offered by banks and dealerships, risk of increased consumer debt, affordability and assessment of consumer ability to repay such debt, as well as the banking sector's exposure to car finance.

The PCP market had stabilized somewhat in 2017, the authors of the letter said.