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Could PCP’s in the car market be the next loans mis-selling scandal?
Concerns have been raised around Britain’s £40bn car finance market regarding driver’s reliance on using personal contract purchase (PCPs) to purchase vehicles. Analysts are concerned the market could be heading towards a mis-selling scandal which will affect a large number of lenders and manufacturers as well as consumers.
New research shows that currently almost 90% of all new cars are bought and sold using some sort of finance deal. The percentage of car sales in the 12 months to January 2017 funded by members of the Finance and Leasing Association (FLA) rose to 87%, up from 47.6% a decade ago. This 87% of car sales financed equates to £41 billion, a number which has nearly doubled in the last five years.
However, there are concerns that a significant majority of customers are being sold loans without having the terms of it explained to them properly and should a financial downturn occur, it could result in thousands of drivers unable to keep up payments on their cars.
Last month, the Financial Conduct Authority (FCA) launched an investigation into the car finance industry as it believes some borrowers, particularly those who are less well off, may be paying too much on their PCP agreement. If the FCA finds that dealers have been mis-selling their products then they are likely to be liable for compensation worth millions of pounds.
One of the directors of the Compliancy Services, Andrew Smith, said that not enough had been done by finance providers to deal with this potential problem; “The majority of customers have no idea who their financing contract is with, even though the rules state the buyer has to know who they are dealing with, along with everyone else involved in the chain.”
Although there is a lot of bad press surrounding PCP’s currently, they can be beneficial if you are aware of the way they work and how you can use these agreements to your advantage. A PCP is similar to hire purchase – you pay a deposit, followed by monthly payments over the agreed term and then at the end you can either pay a “balloon” payment and own the car or hand it back.
- You will choose the car you want and agree on a finance deal with the dealer. The deal will cover how long the deal will last for and the mileage allowance per year; if you do more miles than those agreed to in the year, you are likely to have to pay an excess mileage charge.
- The finance provider will then set the guaranteed minimum future value (GMFV) for the vehicle (also known as the residual value).
- Once everything has been agreed to, you will pay your deposit which is around 10% of the car’s purchase price. However, you can pay more for your deposit and the amount you end up paying depends on how long you would like the finance deal to last for and the mileage allowance agreed to.
- A PCP deal typically lasts for between 2 and 4 years and you will make monthly payments until the end of the agreement term. At the end of the term, you will have three options available to you:
- Hand the car back to the dealer and you will have no more money to pay on it.
- Use the value of the car to put towards buying a new car on another PCP deal and if your car is worth more than the GMFV, you are likely to be given a discount on the value of your next car.
- Make a final payment to keep the car. This can be quite expensive and will usually end up totalling in the thousands dependent on the car’s original value and the GMFV agreed initially.
There are many benefits to PCP’s which is why they have become so popular over the past couple of years. The benefits of these agreements include the relatively small deposit you will be able to put down in comparison to other options, the monthly payments are low compared to those associated with a personal loan and you know the minimum your car will be worth at the end of the PCP deal.
However, you will not own the car unless you decide to make a large final payment, you will have to pay extra charges for going over the agreed mileage allowance and if the car is not deemed to be in good condition at the end of the PCP term, there is likely to be a deduction from the agreed GMFV.
Although, a PCP deal can be beneficial to help some purchase the car they want or need, consumers need to be made aware, by the finance providers, of exactly who their PCP deal is with and what the restrictions are on the agreement.
As the FCA are becoming more worried about vulnerable borrowers being taken advantage of regarding this area of borrowing, they are looking to tighten regulation further. The number of PCP’s shows no sign of slowing and unless stricter regulation is introduced, it is worth knowing your rights when it comes to PCP’s and only using this option if you know you can afford it.