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Pushy salesmen have raked in millions with a new form of motor finance, but be warned...
COMPLICATED car loans sold to customers are leaving thousands of motorists with deals they cannot afford to keep or even to terminate. So eager are car salesmen to facilitate these lucrative loans – known as‘ personal contract purchases’ – that buyers are not being given sufficient time to properly digest key details.
Stuart Masson, of motoring advice website The Car Expert, says: ‘Customers are being told a onesided story about how fabulous these agreements are.
‘ There is nothing wrong with them when fully understood, but they are now the default way to buy a car and not the best option for all customers.’
The rising popularity of PCPs, as they are commonly known, has caught the attention of regulator the Financial Conduct Authority. It will soon publish details of its investigation into the motor finance sector.
Buyers driven into a negative equity trap
WITH a personal contract purchase, a car buyer puts down a deposit. They then take out a loan on the price of the car plus interest. But each month customers only repay the difference between the cost of the car and its estimated worth after an agreed date – usually three or four years. Then, when the loan period comes to an end, the motorist has choices.
They can pay its estimated value agreed at the loan’s commencement – a sum known as the ‘balloon payment’ – and the car is theirs.
Alternatively, they can return the vehicle and walk away – or take out a new PCP deal on a different car.
Until recently, it was typical for the balloon payment to be less than the value of the car, so customers could trade in their wheels and use the profit as a downpayment on a new car. This helped fuel the popularity of PCPs.
But used car values have fallen, so many customers are now discovering the final payment exceeds the car’s value. So they either hand back the car and have no vehicle to drive – nor a deposit for a new one – or overpay to keep it.
If they make the balloon payment, there are usually additional fees to pay. If they ditch the car, they may be faced with repair costs or penceper-mile charges if they have gone over the mileage allowance agreed when they set up the PCP.
The vast majority of drivers – around two-thirds – are now using PCPs to purchase their cars.
The latest figures from the Finance and Leasing Association, which represents the motor finance sector, show an 8 per cent annual rise in the sale of consumer car loans through dealerships.
But the number of new and used cars sold has risen by only 2 per cent. The average loan is £15,115 per car, compared to £14,234 in the previous year. Stuart Masson says: ‘Car dealerships are making more money from selling finance than cars. It is an industrial scale problem and not the case that all customers are stupid.
‘PCP is a merry-go-round that is hard to get off without losing either money or your car.’
A mystery shopping exercise by comparison website Confused.com reveals pushy sales practices – with one in ten undercover buyers at dealerships refused the chance to shop around for alternative car finance.
One in six buyers felt they were being pushed into taking out a PCP on the spot.
A separate poll by the website reveals that one fifth of car buyers did not feel fully informed about what they were signing up to.
Complaints quadruple in just four years
EVIDENCE that car finance is an area for concern is borne out by soaring complaints figures.
The Financial Ombudsman Service, which acts as mediator in fallouts between lenders and customers, has seen a marked increase.
Its figures includes hire purchase, another type of car loan. But most car finance agreements are PCPs.
Complaints have nearly quadrupled in four years, from 1,511 in 2014 to 5,805 in the 12 months to the end of March this year. The trend is not slowing, with 2,031 new cases take non by the Ombudsman between April and June alone this year – more than for the entire year ending March 2015.
Though some complaints come from people who perhaps should have known or budgeted better – the latest data shows the Ombudsman has supported the grievances of customers in two-fifths of cases.
Resolver, a free online consumer complaints service, is predicting more trouble in this market.
Founder James Walker calls the contracts ‘fiendishly complicated’. He adds :‘ Anything that is weighted so spectacularly against the consumer is unfair. These contracts should be more straightforward and l ess packed with hidden costs.’
Easy credit... but complicated rules
GINNY Hughes, from Hertfordshire, has branded PCPs a ‘rip-off’. Her son and daughter both took out deals and both regret their decision.
She says: ‘My son went to a dealership and came away with a car three hours later – despite only just having finished university and not having much by way of income. I think he was shocked by how easy it was.’
There is still £5,000 owing on the loan for a car worth £6,000 less than when the deal was agreed.
When Ginny enquired on her son’s behalf about returning it, the dealership said it would charge £1,000 for a scratch on the bodywork.
She says: ‘New owners will find themselves paying for a car no longer worth the amount they are paying. As parents we were horrified by the terms of the deal.’
Ginny’s daughter is also in negative equity under her plan and has exceeded the mileage allowance. She will owe 10p a mile if she returns it.
Ginny adds: ‘ Dealerships are pushing these loans without care for rules and regulations.’