Make sure your car loan won’t put you on the road to ruin
HAVE you noticed how a suspiciously high number of people seem to have lovely, shiny new cars these days?
Or how the next-door neighbour seems to have a brand-new vehicle every three years? 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 has swept the industry lately.
The numbers are huge. According to the Finance and Leasing Agency (FLA), the trade body for the finance industry, £44 billion in business involved PCP agreements in 2017. But what on earth is it?
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 (though 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 can last for years and the item might be obsolete by the time you own it. Enter PCP.
PCP deals allow for the fact that you might want to change your vehicle every few years. It works like this:
■ You pay a deposit for the vehicle.
■ You take out a loan for the amount that the car is predicted to lose in value over the term of the deal (usually three years). They knock the deposit off this.
■ 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.
A PCP deal is a hugely complicated way to take a loan out on a car that you give back and sometimes make money from. The problem is the 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? If the guesstimate you were asked to make about your total mileage over the three years was too low you could end up paying up to 10p a mile extra for each mile over the limit!
As for damage charges, anything outside of normal wear and tear can result in charges.
Of course, where there’s a surge in business, there will be irresponsible lending. Not all lenders are dodgy, but some are very much the traditional stereotype of salesmen.
We’ve seen loans bigger than people’s salaries, faked details on applications and key factors like significant charges or lending fees not mentioned.
The rules around PCP are just the same as any lending. Both the sales’s business and the loan company are regulated and you can complain to Resolver and the Financial Ombudsman.
Countless people have been sold ‘add on’ insurance policies to cover damage to tires or pay for minor dents. These policies can cost an extra £1,000 – yet they should be free or part of the deal. I believe this is the next big mis-selling scandal.
■ TO make a complaint to Resolver visit resolver.co.uk or email yourstories@resolvergroup.com