An Economic Letter by Martina Sherman, Tiernan Heffernan and Bryan Cullen provides, for the first time, comprehensive data on the personal contract plans (PCPs) market in Ireland. The data was compiled following a survey of all lenders in the PCP market by the Central Bank statistics division to provide a reliable data source on the market as part of the Central Bank’s role as the main complier of statistics on developments in the Irish economy and financial sector. The data shows significant year-on-year growth in the market since 2012, although the market stabilised in 2017.
The key findings are:
- At the end of 2017, Irish households owned 126,249 contracts related to PCP finance, equivalent to €1.5bn
- Outstanding contracts increased from just over 14,000 in 2012 to over 126,000 five years later. On average, 35,000 PCPs are now taken out every year, compared to 6,000 in 2012
- The average value of contracts also increased in recent years from circa €15,000 to over €23,000
- PCPs are the current driver of growth in bank-related lending to Irish households for non-mortgage purposes and have been the most prevalent source of car finance in the Irish market since April 2016. PCPs now account for 43% of car-related bank debt, up from 25% at the end of 2014
- Most PCPs are advanced by Irish resident banks, but 1 in 9 are extended by non-bank entities
- As with any type of lending, there are risks involved with PCPs. These relate to falling demand for new and used cars, increasing interest rates and negative equity scenarios.
- Negative equity may be of particular concern in the Irish market, given the post-Brexit fall in the value of Sterling which has seen an increase in cheaper used car imports, potentially reducing the prices of used cars in the future and pushing existing PCP contracts towards negative equity.
The Economic Letter also outlines a number of issues which may require further consideration:
- The incentives offered to consumers by dealerships and banks
- The risks of increased consumer indebtedness
- The appropriateness of affordability and credit checks used for PCPs
- The level of exposure in the banking system to the car finance market.
The views presented in Economic Letters are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.