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The Problems with Using Personal Contract Purchase (PCP) for Purchasing Cars

90% of people in the UK currently use personal contract purchase (PCP) as a way of purchasing cars on finance – however, an investigation led by the Financial Conduct Authority (FCA) has highlighted that this may not be in the best of the customers, with the average motorist spending up to £1,100 than they need to.

Personal contract purchase allows motorists to pay a small deposit and make monthly payments for 3 to 4 years, with the option to make a large balloon payment at the end in order to own the car outright. For many, this is an attractive commercial arrangement to afford a new or used car.




However, the FCA has highlighted two main issues with this car finance arrangement:

1.Car dealers charging inflated prices

Until recently, car dealers have been the middlemen between car finance companies and customers looking for a new car (find our more here). Finance companies have given car dealers the green light to loosely change APR on any deals they offer – and this has encouraged dealers to charge higher prices in the attempt to maximise commission.

From the customer’s perspective, they may be paying a much higher price, when this does not need to be the case.

2. Balloon payments are unaffordable

By the end of the 3 to 4 year contract, the motorist has the choice to pay a balloon payment to own the car outright. Currently, most balloon payments are very high and often far more expensive than the customer can afford. Therefore, paying for the car for 3 or 4 years does not realistically help the individual get closer to affording the car – it becomes a bit of a lost cause.

If the customer wants to return the car, their agreement states that there will be penalties and the vehicle will lose money for things like scratches, dents and any mileage (although this is very loosely calculated and not always accurately recorded).

What does the future hold for PCP?

Personal contract purchase is not the only form of car finance available. Currently, any customer can use other forms such as a simple personal loan or use hire purchase, which involves paying a deposit and then a monthly fee for 1 to 7 years until you own the vehicle outright.

As it stands PCP is still available and continues to be used by 9 out of 10 motorists in the UK. However, car dealers have been stopped from inflating prices and this form of car finance is still under review by the FCA and new framework is expected to emerge later this year. Already, the FCA has said that limiting the freedom of car dealers can save Britons over £165 million per year.

Will people be able to make claims or request refunds against PCP?

Some financial experts have hinted at the possibility to claim against car dealers and refunds of up to £1,100.

Given the millions of Britons using the type of finance, the claims volumes could be significant and some have compared the scenario the the millions of refunds claimed through PPI in recent years.

However, the FCA plans to offer more insight into this by the end of 2020.



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