‘Balloon payments’ to burst on car loans

NEW car repossessions could trigger a financial crisis, the Dáil was warned yesterday.

Deputies heard the startling suggestion amid warnings a wave of repossessions and forced sales of new or near-new cars is likely because of the growing number of car buyers buying expensive cars with low monthly payments over a fixed term in Personal Contract Plans (PCPs).

Customers initially pay a deposit of between 10% to 30% and then have to pay the outstanding balance on the car at the end of the fixed term.

However, the final or ‘balloon’ payment is typically many times more than the monthly payments they would have been paying during the fixed term.

Unless they intend trading the car in with the same lender, they won’t own their car unless they make their ‘balloon’ payment. Unlike more traditional hire purchase agreements, when the final balloon payment falls due, the customer can either pay the outstanding sum and own the vehicle outright or carry the equity forward into a new PCP agreement on a different car.

It is believed that as many as one in three cars are purchased using these PCP contracts, which would mean there were about 50,000 cars purchased this way last year alone.

But is unclear as to how closely the PCP loans market is being regulated and who is responsible for regulating it.

Indeed, so concerned about the issue is the Competition and Consumer Protection Commission that they have raised their concerns with both the Central Bank and the Department of Finance.

Fianna Fáil TD Thomas Byrne told the Dáil yesterday: ‘Many of those who bought cars in 2014 are coming to the end of their PCPs and, as per the contract, are now being forced to make a [balloon] payment.’

He said there is a danger of an increasing number of people unable to pay their final balloon, and often because they simply didn’t understand they’d have to make this larger, ‘balloon’ payment before they own their car.

Tánaiste Frances FitzGerald said she was aware of the debate in the United Kingdom about PCPs.

‘It is an area to which the public needs to be alerted,’ she said.

‘This has led to people taking on unsustainable debt.’