Issues: Car buyers have a good variety of options, but leasing has not, so far, been a major choice. John Cradden reports
<strong>Q</strong> Is leasing a poor deal for the ordinary motorist who wants to finance a new car?
Not necessarily. If you are a relatively low mileage motorist who wants to change car at least every three years, car leasing deals deserve consideration. However, it is better to consider a product like a PCP rather than a standard, contract hire-type lease, which is geared more towards business users than private motorists.
<strong>Q</strong> Just to clarify, how exactly does the standard lease work?
Under a standard lease, the customer essentially rents the car from the finance company for a fixed amount each month for between three and five years. No deposit is required and the monthly fees are determined by the value of the vehicle, its projected depreciation and interest rates. At the end of the lease, the car is returned to the finance company, which will sell it to a third party, and the customer is free to pick a new car and negotiate a new lease.
There are always mileage restrictions on a leasing deal, as well as extra payments if the car has suffered any undue wear and tear, such as cigarette burns or paintwork damage.
<strong>Q</strong> What is the difference between a standard lease and a PCP?
The PCP combines elements of both HP and leasing arrangements. The monthly payments are usually much lower and the interest rate is fixed, but you must have a cash deposit or a car to trade-in.
Unlike the standard lease, you always know what you are paying with a PCP.
At the end of the repayment period (usually three years) you have a number of choices. Like a standard lease, you can hand the car back, pick a new car and start a new package. Or you can hand the car back and walk away.
You can also choose to buy the car by paying what is called a "balloon payment". This sum is agreed between the customer and the dealer and represents a "guaranteed value".
It is calculated at the start of the deal by taking into account expected future values, mileage during the term as well as normal wear and tear. For example, a dealer may underwrite a new Ford Focus 1.6 LX costing about €20,000 for a guaranteed value of €10,500 in three years time, as long as it has covered less than 30,000 miles and has been reasonably well looked after.
Finally, if you want to keep the car but cannot afford the ballon payment, you can also arrange to extend the monthly payments for a further period.
<strong>Q</strong> What is the difference then, between a PCP and HP?
The essential difference is that with a PCP, you have all the choices outlined in the last answer.
<strong>Q</strong> I've heard a lot of stories about people getting into difficulty with these 'balloon payments'.
There have been stories about customers who took out certain HP or PCP deals a couple of years ago and are now in a "negative equity" situation where the balloon payment required to buy the car is much higher than its actual market value.
Industry sources suggest that these payments were set at "unrealistic" levels at the height of the new car sales boom. Since then, the residual values of relatively new second hand cars have plummeted.
The Office of the Director of Consumer Affairs says it regularly receives complaints from consumers who say they were not properly informed or even misled about the nature of some HP and PCP deals. For example, many customers believed that the car was theirs the minute they drove it out of the showroom.
<strong>Q</strong> But isn't it true that you never really own a car bought with HP until the last payment has been made?
Sort of, yes. The only way you can own a car straight out of the showroom is via a personal loan from a bank or credit union, enabling you to buy the car outright. This is more popular among older customers.
On the ownership question, it is worth noting that if you get into serious difficulties with repayments on HP, you do have some measure of legal protection against repossession if you have paid more than a third of the cost of the car.
Unfortunately, with the more recent balloon payment-structured HP deals, these legal safeguards will not take affect until much later because most of the payments are deferred until the end of the term.
<strong>Q</strong> Are you protected in the same way with PCPs?
It is not at all clear if any such protection exists with PCPs. The outdated Consumer Credit Act (1996) does not mention these PCPs or even balloon payment HP deals because they are relatively new. In addition, PCPs are halfway between leasing and HP products, so there is confusion about whether it should fall under the rules for leasing products or for HP products. This is where to you need to read the small print. If necessary, contact the Office of the Director of Consumer Affairs and ask for the Consumer Credit section if you are not sure.
<strong>Q</strong> All this doesn't fully explain why HPs are still popular and PCPs are not.
Finance houses and dealers don't seem to have a lot of enthusiasm for PCPs, particularly since the fall in used car values. By agreeing to buy back the car at the end of three years for a "guaranteed value", they may lose out if used car values fall further than expected in the future. With HP, customers are shouldering the risk.
Another reason is that Irish people place a much greater priority on ownership. We do have one of the highest house owner-occupancy rates in the EU, after all. Leasing generally is not something that sits well with the Irish ownership mentality.
<strong>Q</strong> I can understand that. Surely you are at least building assets through HP?
Well, yes, but since the value of the car is always falling (the depreciation on a new car is sharpest in the first three years), the payments on HP, like a lease, are still a liability.
<strong>Q</strong> Anything else I should know?
You also have the option under PCP of selling the car privately and paying the finance company the balloon payment at the end of three years. So if market conditions are good or you can find someone who is willing to pay €11,000 or more for a car with a guaranteed value of €10,500, you could actually make a small profit.
You can also do this with some HP-based products, such as Bank of Ireland Finance's EasyPay, but unlike a PCP, there is no guaranteed value underwritten on the car.
<strong>Q</strong> So does leasing/PCPs offer better value for me?
Even assuming that you do want to change your car regularly and do a relatively low mileage, leasing does not offer substantially better or worse value. The 'guaranteed value' aspect of the PCP may appeal because of continuing pressure on used car values, however. PCPs/leasing will not suit those who do a high mileage or who want to own the car as soon as possible. It is also not always clear what the penalties for missing payments would be.
Even if you find that PCPs or leasing would suit you, HP packages are more heavily marketed here so you might get more in the way of special offers and extras.
And don't forget that a personal loan, although it is generally more expensive than a HP, may provide you with the bargaining power to secure a better discount off the list price of the new car.