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Do Consumers Understand PCP Car Finance? An Experimental Investigation

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Abstract

Personal contract purchase (PCP) plans are innovative and increasingly popular forms of car finance. PCPs are inherently more complex than established financing options. The present study used experimental behavioural science to explore consumers’ comprehension of PCP plans and scope for beneficial interventions. Choice tasks, product rating tasks, and multiple choice comprehension questions were deployed to measure the consistency of decision-making and explicit comprehension of the product. Disclosures and advice were varied across conditions. A representative sample (n = 100) of consumers was initially given information on PCP deals as typically disclosed by car dealers. Results revealed that understanding was poor. One quarter of participants performed below chance on multiple-choice comprehension questions. Participants were prone to inconsistencies and objective mistakes when deciding between and rating offers. Disclosures designed to improve processing of mileage and cost information had ambiguous effects. Consumer advice sheets improved comprehension and reduced mistakes, with advice containing a diagram outperforming advice containing only text. The findings raise consumer protection concerns and support improved advice and stronger regulation.

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Notes

  1. Strict dominance means that one deal was objectively superior since it was at least as good on all product attributes while being superior on at least one.

  2. Data for three participants were discarded on the grounds that their responses were too erratic to estimate an indifference point.

  3. We also tested for interactions of the PCP condition with gender and car ownership, both of which were non-significant and are excluded here for reasons of parsimony. Including these interaction terms does not alter the reported results.

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Acknowledgements

This research was undertaken as part of PRICE Lab, a research programme funded by the Competition and Consumer Protection Commission, the Commission for the Regulation of Utilities and the Commission for Communications Regulation. For helpful feedback, we thank seminar audiences at the ESRI and the 10th Annual Irish Economics, Psychology & Policy Conference. For useful suggestions, we thank Cameron Belton, Áine Ní Choisdealbha, Deirdre Robertson, Shane Timmons and the staff at the Competition and Consumer Protection Commission. We also thank Noel Howard for assisting with data collection.

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Authors and Affiliations

  1. Economic and Social Research Institute (ESRI), Whitaker Square, Sir John Rogerson’s Quay, Dublin 2, Ireland

    Terence J. McElvaney, Peter D. Lunn & Féidhlim P. McGowan

  2. Department of Economics, Trinity College Dublin, Dublin, Ireland

    Peter D. Lunn

Authors
  1. Terence J. McElvaney
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  2. Peter D. Lunn
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  3. Féidhlim P. McGowan
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Corresponding author

Correspondence to Peter D. Lunn.

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Appendix

Appendix

One set of multiple-choice questions (MCQs). Questions were rephrased or inverted for the second set, with the order of the two sets counterbalanced across participants.

  1. 1.

    In a PCP agreement, what is the APR (annual percentage rate) charged on?

    1. (a)

      The retail price of the car minus the GMFV

    2. (b)

      The retail price of the car minus the initial deposit

    3. (c)

      The GMFV (guaranteed minimum future value) of the car

    4. (d)

      The retail price minus both the initial deposit and the GMFV [correct]

  2. 2.

    Assume the second-hand car market has done well over the course of your PCP deal and the price of a second-hand car has generally risen:

    1. (a)

      This could be good for you because you have a greater chance of having positive equity at the end of your deal [correct]

    2. (b)

      This could be bad for you as you will need to pay more to purchase your car at the end of your deal

    3. (c)

      This has no relevance for you and your PCP agreement

    4. (d)

      I do not know

  3. 3.

    At the end of a PCP agreement, the dealer evaluates the market value of the PCP car. You can then use any positive equity on the car towards the final payment on the car in order to take full ownership:

    1. (a)

      True

    2. (b)

      False [correct]

  4. 4.

    When establishing the mileage allowance for a PCP deal, the higher the mileage:

    1. (a)

      The lower your GMFV should be [correct]

    2. (b)

      The higher your GMFV should be

    3. (c)

      Neither of the above

    4. (d)

      I do not know

  5. 5.

    At the end of a PCP deal, the dealer evaluates the market value of the PCP car. If you wish to move onto a second PCP deal, what aspect of your previous PCP deal can be put towards your new deposit?

    1. (a)

      Your original deposit from your first PCP agreement

    2. (b)

      The market value of your first PCP car

    3. (c)

      The difference between the market value of your first PCP car and its guaranteed minimum future value [correct]

    4. (d)

      The guaranteed minimum future value of your first PCP car

  6. 6.

    At the start of a PCP deal, the higher your GMFV:

    1. (a)

      The lower your monthly payments [correct]

    2. (b)

      The higher your monthly payments

    3. (c)

      Neither of the above

    4. (d)

      I do not know

  7. 7.

    At the end of a PCP agreement, the dealer evaluates the market value of the PCP car. If I choose to walk away and not purchase the car or enter into a second PCP agreement, I am not entitled to be rewarded or make use of the positive equity on my PCP car for returning it in good condition:

    1. (a)

      True [correct]

    2. (b)

      False

  8. 8.

    At the start of a PCP deal, the lower your GMFV:

    1. (a)

      The lower your chances of having positive equity at the conclusion

    2. (b)

      The higher your chances of having positive equity at the conclusion [correct]

    3. (c)

      Neither of the above

    4. (d)

      I do not know

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McElvaney, T.J., Lunn, P.D. & McGowan, F.P. Do Consumers Understand PCP Car Finance? An Experimental Investigation. J Consum Policy 41, 229–255 (2018). https://doi.org/10.1007/s10603-018-9380-5

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  • DOI: https://doi.org/10.1007/s10603-018-9380-5

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