Beware the PCP Promise
I can often be found with a cup of coffee in hand on a Sunday morning, settling in to read a few of the national newspapers. A few weekends ago an article in the Mail on Sunday caught my eye because its subject is close to my heart (and my job). It was about car loans, in particular the rise and rise of Personal Contract Purchase (PCP) loans. I know many people who have chosen to finance their car purchase in this way, but less people who are really aware of the implications of doing so.
So, it was with a certain degree of pleasure that I found the article really focused in on the growing problems these type of loans are becoming, so much so, that they have caught the eye of the Financial Conduct Authority. Any time soon, the regulator will be publishing some findings into their investigation of the motor finance sector.
With a PCP plan a buyer takes out a loan on the price of the car plus interest. But each month the buyer only repays the difference between the cost of the car and its estimated worth after an agreed date, which is most commonly three or four years. When the loan period comes to an end, the buyer is presented with a number of choices. They can pay its estimated value, which was agreed up front, and the car is theirs. This is known as a balloon payment. They can return the vehicle and walk away, or they can take out a new PCP deal on a different car. All sounds okay so far.
However, until recently, it was common for the balloon payment to be less than the value of the car, so you could trade in your car and use any profit as a deposit on your next purchase. But the issue is that used car values have fallen recently, leaving many customers having to find money to make the final payment because the car is worth less than the balloon payment. Think negative equity.
The article in the Main on Sunday quoted some findings from a mystery shopping exercise carried out by Confused.com, which revealed some very dubious sales practices. One of the key findings of the mystery shopping was that 1 in 6 buyers felt they were being pushed into PCP on the spot. Interestingly, further online research found that 20% of people did not feel they were fully informed about what they were signing up to.
This has been backed up by a marked increase in complaints to the Financial Ombudsmen Service. They have reported a quadrupling of complaints in the last four years. Of course, some of these complaints will have come from people who should have budgeted better, but it’s interesting to read that the Ombudsman has supported 40% of the cases.
The point here is that if you’re thinking of taking a car loan soon, it certainly provides some food for thought. At bira bank, we offer car loans and you can talk to Frank and David about these when you need to. Until then, I thought it would be worthwhile sharing a few tips for arranging and, just as importantly, clearing a car loan.
By John Collins, Managing Director at bira bank