PCP Car finance deals – the real costs and pitfalls

That classic moment in the endearing “Shark Tale” family movie so familiar to many, where the huge great white shark revealing its double row of killer teeth, leering sadistically at its captive, colourful and diminutive marine buddies, utters the immortalised line, “fish are friends …. not food”.

It is often observed that the criminal underworld refer to those in the ‘business’ of lending money, along with an exceedingly undesirable set of caveats, as the ‘loan shark’.  Sadly this is often seen as only slightly lower than the average car salesman, and all too often many people, regardless of status, social prowess or business acumen, stand like those vulnerable marine buddies with their finances potentially stripped to the bone, wondering how they signed away such sizeable chunks of money.

While this is indeed speaking in caricatured metaphor, the question must be asked, “what is the real cost of PCP finance”, or a Personal Contract Plan, another mellifluous acronym steering the public into the promise of exceedingly affordable payments, whilst garnering the grand prize ownership of a new car – plus a glorious upgrade in a mere few years!  Yes you could lease a car, which in effect is simply renting your vehicle, but this is without any future equity or ownership options.

If you do not possess sufficient disposable funds,  a PCP may appear to be the only way in which you can own a brand-new car, along with protection and promises. All will appear reasonable – even when the small print ‘minor’ conditions appear, as at this point the momentum has truly kicked in with the desire for that glistening prize at the end of it.

A PCP can be broken down into three component parts, the deposit (usually a minimum 10% of the cars price, although some finance companies offer the option to increase that deposit to lower the monthly commitment), the amount you borrow, which is controlled around what the predicted loss will be over at least two years, but usually three or even four, and the final balloon payment referred to as the GFV or Guaranteed Future Value.

It must also be noted, you can only attain the attractively advertised low repayments, if you are deferring a significant proportion of the purchase price to the end of the PCP term and statistically, the customer usually very quickly finds excuses to believe the extra jump in monthly costs will be worth it.

But do make sure you check the interest rates – it’s not just about the monthly payments.  These may be affordable, but you could be paying considerable interest payments over the PCP term, without the additional costs of the balloon payment, which if you do not have that money in place could mean yet another loan to pay it off.

As an example, let’s say you intend to ‘acquire’ a car currently on sale new for £20,000 and you want to set up a PCP over three years. You pay £2000 deposit as the minimum required, leaving £18,000.

However, it has been agreed that the car will only be worth £8000 at the end of the term, so you will have to pay the £10,000 outstanding plus the interest on the entire £18,000 over the three-year period. Having paid the £10,000 plus the interest on £18,000, to keep the car you still need to make the final balloon payment, which is £8000, or of course hand the car back.

This is usually an unattractive solution at this point, so you defer to the initial ‘bonus’ option of being able to ‘acquire’ a new car at some point before the end of the term, because you have actually gained enough equity to instantly put down for a new PCP deal on a new car, and off you drive.

Many people do this, as indeed the motor industry anticipate, because one of the primary clauses is mileage penalties and damage charges.  A lower mileage car in top condition, obviously being worth much more in resell terms, means a gleaming new car becomes the desirable and actually the seemingly more convenient option. Further bonuses will have been included such as free MOT’s, various service plans and insurance options, although some of the conditional wear and tear penalties may mean you are paying for tyres and other expendables, so further costs still accrue.

PCP opportunities have proved very successful, albeit often through the path of least resistance to drive and park new cars on your driveway.  There are of course other ways to access loans or the afore-mentioned leasing option, however the nebulous offer of feeling like you will ‘easily’ become the owner of a lovely new car, continues to entice the new car buyers, and this will almost certainly remain in place for some time yet.

This has been recognised by the Financial Conduct Authority (FCA), and they have confirmed the implementation of new rules, so that customers will save an estimated £165 million a year, but note, they won’t come into force for another six months.

The rules will stop dealers and brokers from earning commissions gained through interest rates charged to customers; some finance companies do offer reward if higher interest rates can be issued, and this is known as discretionary commission. Customers simply accept that the interest is fixed yet it is just as negotiable as the price of the car. The whole discretionary commission model will be banned, and the associated rules of commission will be tightened so that consumers are given all the full and relevant information.

The importance of fully investigating what you are buying into is especially significant when many people don’t have the consistent funds they once maybe relied upon, and the second hand car market can be prone to major fluctuations in resaleable worth. It is significant as well, that the FCA have acknowledged some practices have not been fair, but rather ‘smoke screened’ and vague, and the new rules should be good news for consumers across the board.








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