Are you on PCP?

Car loan

11/05/17 When is a good deal, not a good deal? The mysteries of PCP

Have you noticed how a suspiciously high number of people seem to have lovely, shiny news cars these days? Or how the next-door neighbour or your annoying friend seems to have a brand-new vehicle every three years? What are they up to these people and how on earth are they affording it?

The answer is simple. They’re on PCP.

No not that one. Personal Contract Purchase – or PCP for short – is a form of hire purchase agreement that’s swept the industry in the last few years.

The numbers are huge. According to the Finance and Leasing Agency (FLA), the trade body for the finance industry, £14,874 million in businesses involved PCP agreements in 2016 alone – 84% of the entire market. But what on earth is it?

The lowdown

A PCP deal is a kind of hire purchase (HP) agreement (a loan basically) to allow you to ‘own’ a product – even though it belongs to the retailer for the duration of the loan. With HP, you’d pay monthly payments and at the end of the deal would own the product outright (thought you’d have paid a lot more for it than its original price tag). These deals were traditionally a 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. Enter PCP.

PCP deals allow for the fact that you might want to change your vehicle every few years. It works like this:

  1. You pay a deposit for the vehicle.

  2. You take out a loan for the amount that the car is predicted to lose in value over the term of the deal (usually 3 years). They knock the deposit off this.

  3. 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 initial value after you deduct the loan and the deposit.

Got that? Me neither. Here’s an example.

  • You want to wipe that smile of your smarmy mate’s face so you take out a PCP deal on a new car that costs £20,000. 

  • You pay £4,000 deposit.

  • The dealer thinks the car will be worth £9,000 in three years, so you take a loan for £7,000 (£20k minus 9k minus 4k). Oh, and interest.

  • At the end of the deal, you’ve got £9k to pay if you want the vehicle. Or…

…there’s a few options at the end of the deal. You can give the car back and walk away. You can pay the £9,000 and buy it outright. Or you can take out a new agreement.

The big incentive for this deal is if your car is worth more than the £9k at the end of the deal. If it’s worth, say, £10k, that gives you £1,000 that you can then ‘reinvest’ in a new deal. What’s not to love?

The problem

So, on paper, a PCP deal is a rather complicated way to take a loan out on a car that you give back and sometimes make money off. The problem is, that money the dealer promised you would cover your next car deposit. It isn’t guaranteed to do that. In fact, you might not have any money to play with at all.

There’s also a charge sometimes for going into a new agreement which can be anything up to £500.

Oh, and did we mention that there’s a mileage allowance? There’s a mileage allowance. If the guesstimate you were asked to make about the mileage you might rack up over the three years was too low you could end up paying up to 10p a mile extra for every mile over the limit!

Oh, and just like a hire car, there are damage charges. Anything outside of normal wear and tear can result in charges. Yikes.

Solutions

Needless to say, many people hit the end of the deal and find out the owe more money, or don’t have the promised money to take out a deposit on a new car. What are your rights?

Well PCP and all car finance are 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. If you’re unhappy at the end of the deal you can make a complaint through Resolver. And if the retailer doesn’t sort it out, we can help you 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.

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