Have you ever wondered how over the last few years people seem to be driving much more expensive cars? Or how on earth people are affording them?

That’s because almost unnoticed, a relatively new type of car finance agreement known as a ‘Personal Contract Purchase (PCP)’ plan has emerged and dominated the market. The advantage of these loans is they enable you to buy a vehicle that might have been out of your price range. The downside is they’re incredibly complicated and come with a considerable number of clauses and catches.

How complicated? Well I pride myself on being able to explain most complex financial matters on the tele in three sentences max. PCP deals take twice as long. And that is a very, very bad sign.

PCP car finance has become the predominant form of credit in both the new and second-hand card sector. In fact, over 9 out of 10 car finance deals involve this type of credit. The figures are jaw-dropping too. Despite the pandemic, in 2021, £41 billion pounds in lending related to car finance. That’s back up to pre-pandemic levels – like the £48 billion in loans in 2019.

So what’s the problem? Well, as I mentioned PCP car finance is so unbelievably complicated, that it’s almost impossible to understand how the deals work, if you’ve been mis-sold or misled – and what to do if you can’t afford the deal and need to get out of it.

However, that’s changing. Car finance is now the second most complained-about product according to the Financial Ombudsman. Yet I think this is the tip of the iceberg.

Here’s my guide to car finance and your rights.

What is PCP car finance?

A PCP deal is kind of like a hire purchase (HP) agreement which allows you to potentially ‘own’ the car – even though it belongs to the retailer for the duration of the loan. With traditional HP, you’d pay monthly payments and at the end of the deal would own the car (or other product) outright – though you’d have paid a lot more for it than its original price tag.

These deals were a relatively good way to pay for things as the retailer would be responsible for repairs during the agreement and you’d own the item ultimately. But HP agreements could last for years, and the item might be obsolete by the time you owned it.

PCP deals work in a rather different way – and you are liable for damage that occurs to the vehicle in most cases too. The big difference is instead of committing to buy something outright, you are able to get credit for some of the value of the vehicle, not the whole thing. So at the end of the deal, you can return the car and get a new one or buy it outright with a lump sum payment. But it’s not that simple…

How does PCP car finance work?

The financial services industry often reinvents old forms of credit over time. PCP deals were introduced to allow for the fact that you might want to change your vehicle every few years. They work like this:

  • You pay a deposit for the vehicle that represents some of the value of the car.
  • You take out a credit agreement (with interest) for a chunk of the value of the car over a set period (usually three to five years).
  • At the end of the term, you can buy the car outright by making a ‘balloon’ payment. This is agreed at the start of the term and is usually what’s left from the car’s value after you deduct the loan and the deposit.
  • Because the value of your car reduces as you use it (as soon as you drive it, the vehicle becomes second-hand) at the end of the term, you could be left with a smaller balloon payment or even some cash in credit from your loan to put towards a new deposit if the value of the car has reduced enough.
  • But you will also have other costs that can be deducted. Like a mileage limit (with prices by the mile over the agreed limit in your contract) or costs for minor damage like dents or scuffs.
  • These things used to be covered by the HP agreement provider in the past, but now you’ll be sold insurance policies or contracts to cover you for these costs that can add over £1,000 to your bill. These policies will usually be on top of the standard car insurance you are required to take out by law.

What can go wrong?

PCP deals are sold as a way for you to own a much more luxurious car than you can afford, that you can trade in for a better one after a few years. Many people are lured in with the promise of a couple of thousand pounds in cashback as part of the deal too.

However, these loans are an incredibly complicated way to pay for a car. The deal will involve a deposit, a credit agreement, insurance, specific product insurance, lump sum payments and a range of caveats that might mean you owe more money.

One example is mileage costs or damage when you come to return the car. These are by the mile once you go over your limit and can add up considerably. The balloon payment is often too high for most people to pay if you want to buy the car. The promised ‘cash back’ rarely materialises and it’s likely you’ll have to pay a new deposit to get a new vehicle.

Many of the problems with these deals come from people being encouraged to borrow more than they can afford. The structure of the loan makes it seem like the more expensive vehicle is within your price range, but in reality, you’re shelling out for something that you probably won’t be able to buy outright, is expensive to insure, run and repair.

In the last few years there has been a great deal of concern over mis-selling. Perhaps inevitably, wherever there is a demand for a product or service, there will be mis-selling. The motor industry has not always had the best reputation for responsible sales in the past too.

I’ve seen a number of cases where people have been sold loans bigger than people’s salaries, faked details on applications and key facts like extra charges or lending fees not being mentioned during the sale.

On top of all of those potential problems, the regulator, the Financial Conduct Authority, has announced that they are banning the payment of commission to car salespeople that incentivises them to sell the higher rate products. This has aroused some interest, because the widespread excessive commission charged during the second wave of the PPI mis-selling scandal also involved commission payments. Claims management companies are moving in to this whole area. Don’t give them free money folks! You can complain about this yourself.

What can you complain about?

There has been a significant rise in complaints about car finance in recent years – and indications are we will be seeing a lot more people seeking help with these loans. You can complain about all or some of the following things:

Financial agreement mis-sales. This category includes; the affordability of the deal, if the full costs weren’t made clear, if you were misled in to taking out the contract and if you were sold a more expensive deal than you wanted.

Commission. This is a new area of complaint. If it turns out that the seller of the deal was paid a large chunk of commission and you weren’t aware of it, or you were sold an unsuitable deal because of commission, you could complain.

Financial difficulties. This can include; repossession and debt collection, if you’re unable to afford the credit agreement and the firm doesn’t help, if the debt is passed to a private debt collector and other problems arising from the firm making things worse if you are in financial difficulties.

Issues at the end of the agreement. This includes; unexpected or unexplained charges and costs, excessive charges for damage and/or mileage, not getting the promised credit refund, problems over the size of the balloon payment, problems cancelling mid-term, refunds and much more.

Add-on insurance products. You can also complain about any additional insurance products you were sold, including cover for hubcaps, alloys, bumpers, windscreen and more. You can also complain to the insurer about claims problems.

Taking things further

Car finance is regulated by the Financial Conduct Authority so even the car dealership that sold you the deal has to follow strict rules about the sale. The dealer needs to make it clear how the deal works and the charges you might face. They should not over promise and should explain how they have worked out the balloon payment.

Keep your documents and what you understood about the deal from the person who sold it to you. And if the retailer doesn’t sort it out, you can take the case to the Financial Ombudsman. All of this is free – and straightforward. So if you feel you’ve been misled, don’t give up – take it further.

Featured in Mirror – Martyn James


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