Understanding how a Personal Contract Purchase deal works

CASH may be tight for many people these days, but have you noticed how lots of people seem to be able to drive very nice (and expensive) cars?

This is possible because of a new type of hire purchase deal known as a ‘Personal Contract Purchase (PCP)’ plan. The positive side of these loans is they enable you to drive a vehicle that might have been out of your price range.

The downside is they’re ludicrously complicated and come with a zillion catches.

Car finance is big business, with an astounding £48 billion in deals sold in 2019 alone. So why are these loans so fiendishly hard to understand?

HOW PCP LOANS WORK

A PCP deal is a kind of hire purchase (HP) agreement which allows you to ‘own’ a product – 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.

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 (takes a deep breath):

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.

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

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term and is usually what’s left from the car’s initial value after you deduct the loan and the deposit.

Because the value of your car reduces as you use it, 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 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.

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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 isn’t guaranteed. You might not have any money to play with at all.

Many people find they owe additional money at the end of the deal for mileage costs or damage. The balloon payment is often too high for most people to pay and it’s likely you’ll have to pay a new deposit to get a new vehicle.

Complaints about car finance have increased

WHAT CAN GO WRONG? WHAT WE SEE – AND YOUR RIGHTS

CAR finance complaints have dramatically increased in the last year – 3,252 people contacted Resolver for help with a PCP finance problem, up 134%. Affordability and missales (along with unfair contract terms) drive most of the complaints I see. So if you get into difficulty, seek help as soon as possible. Most importantly, if you’re getting a new car, set yourself a limit on what you can afford before you shop – and don’t get lured in by the patter. ■ Get help with a car finance complaint at resolver.co.uk