Deals that are used to finance the purchase of around one third of cars are not understood by consumers.
Research has found that the key aspects of personal contract purchase (PCP) plans are confusing for motorists and their grasp of the products is poor.
PCPs are complex financial arrangements and come with a number of conditions, according to the research undertaken by the Economic and Social Research Institute (ESRI).
PCPs are a form of hire purchase and are now used by one-third of people buying new cars.
However, this form of finance is not regulated by the Central Bank.
Cars bought using PCs deals usually have lower monthly payments than hire purchase agreements or loans, increasing affordability and making them attractive.
The key element is that a large proportion of the cost of the car is deferred to the end.
This form of financing was introduced by car manufacturers during the bank-induced economic crisis as lending was constrained. More than €800m in PCP finance was extended to drivers in 2016, according to a separate report. This was up 65pc from the previous year.
ESRI researchers Prof Pete Lunn and Terry McElvaney said it was of particular concern that consumers have a poor understanding of what happens at the end of the deal.
Car buyers who take out PCP finance are often surprised to discover that after putting down a deposit, making three years of monthly payments, caring for the vehicle and staying within agreed mileage limits, they end up owning little or no asset in return.
ESRI researcher Terry McElvaney, who led the study, said: “The findings of this experiment suggest that PCP deals should be considered complex financial products.
“Given that buying a car is the second biggest financial transaction most people undertake, it is vital that consumers entering these deals know what they consist of and what they are getting into.”
The ESRI team undertook an experiment, with participants given information about PCPs typically given to car buyers.
They were then tested to see if they could judge PCP offers accurately and if they understood the key features.
The findings raise concerns about consumer protection, according to the ESRI.
It revealed that participants found it harder to choose consistently between PCP deals than hire purchase deals.
When rating adverts, they often rated inferior PCP deals to be better value than superior ones.
The authors said: “The tests demonstrated a clear lack of understanding. Almost one quarter of the consumers performed no better than chance on multiple choice questions that tested whether they had absorbed the central facts about how PCPs work.”
All the participants made some mistakes.
PCP deals are now a popular way to buy a second-hand car.
Average contracts are around €25,000, according to the report.
People selling PCPs are not required to check if the consumer can afford the deal, unlike a loan.
The Competition and Consumer Protection Commission (CCPC) recently called for changes in the law to ensure the finance deals are regulated.