The state's consumer protection watchdog has warned of the risk that consumers buying cars through Personal Contract Plans may take on too much debt.

In its report on the market for Personal Contract Plans (PCPs) the Competition and Consumer Protection Commission (CCPC) concludes the lack of mandatory checks by lenders to ensure car buyers can afford the debt they are taking on creates risks of over-indebtedness for consumers and inappropriate lending practices.

PCPs are a form of finance through which car buyers can buy a vehicle with relatively low monthly repayments by deferring the bulk of the price to the end of a specified period - usually three years.

They are used to finance around one in three purchases of new cars in Ireland.

The CCPC report estimates the number of new PCPs issued rose from 21,000 in 2015 to almost 33,000 in 2016.

The value of PCPs issued in 2016 was €800m and the average value that year was €25,000.

The commission's report raises concerns that some buyers may not understand the terms of their contracts.

Each PCP, for instance, specifies that at the end of the finance period the car will have what is called a "guaranteed minimum future value" or GMFV.

That is the amount a consumer would have to pay if they want to own the car outright. Otherwise their options are either to hand the car back to the dealer or to "roll" their PCP into a new contract on a new vehicle.

But the CCPC questions the extent to which consumers are aware that the GMFV may be significantly less than the cash deposit they have to put down to buy the original car. It says the monthly repayments are likely to be "far higher on their second car than on their first".

The CCPC says this is "an eventuality that may not have been clear to them from the outset".

The report also casts doubt on whether consumers understand that if prices fall in the second-hand car market this has implications on the equity they might otherwise have expected to have. If the price for their car is lower than the GMFV at the end of the finance term, for example, they will have no equity to put towards a new vehicle.

The CCPC recommends the Consumer Credit Act be amended to cover PCPs.

The report also recommends PCPs be brought within the Central Bank's Consumer Protection Code. "This would have the effect of mirroring the protections that are currently afforded to consumers who purchase other types of financial products, including suitability and affordability checks and general requirements around the provision of information," it said.

Fianna Fáil finance spokesperson Michael McGrath said he believed it was important the Central Bank's Consumer Protection Code would be applied to PCPs "to ensure the finance company assesses the affordability for the consumer".