A personal contract purchase (PCP) seems like a great option on paper. It’s a convenient way to get the latest model of car, without spending a fortune. However, like many loans, its not without its problems.
Increasingly, PCP customers are complaining about the way they were sold their PCP, and it looks set to become the next major mis-selling scandal. The FCA have already started investigating the situation, and their findings are somewhat worrying.
If you’ve got a personal contract plan, this guide will help you to identify whether you’ve been mis-sold to or not, and what steps to take if you’d like to seek compensation.
- What is a PCP?
- How Does a PCP work?
- What are the differences between PCP and HP?
- What is financial mis-selling?
- How is a PCP mis-sold?
- What to do if you have been mis-sold PCP
What is a personal contract purchase (PCP)?
A PCP is a popular way to finance the purchase of a car. It works in a similar way to a hire purchase agreement; you pay with an initial deposit, then a series of monthly payments for a set period of time. Contracts usually last between two and five years.
But here’s an important thing to note – the monthly payments don’t cover the value of the car. What you’re actually paying off is the difference in the car’s value, from when you purchase it, to when the contract finishes. So, if the difference in a car’s value from when you purchase it, to when the contract is finished is £4,000 – that is what you will pay in total. That’s what makes the monthly costs typically far cheaper than other types of car financing.
At the end of the contract, you can either agree to another PCP for a new car or pay a lump sum to keep your existing vehicle. This is called a balloon payment.
A personal contract purchase enables people to afford a brand-new car, which is why it’s becoming so popular. To give you some idea; back in 2012, the total amount of car loans taken on by consumers was £28 billion. In 2016, just four years later, that figure had risen to £58 billion. Unsurprisingly, motor finance is second only to the mortgage market when it comes to loans
The total amount customers could be over-paying in interest charges per year due to mis-sold PCP Schemes
The average amount a single customer could be over-paying in interest charges on a typical £10,000 mis-sold PCP scheme over four years
The estimated number of customers affected by mis-sold PCP schemes
The total amount of car loans taken on by consumers in 2016
The difference between the average and highest commission a broker could earn through different commission models – incentivising brokers to charge higher interest rates for higher commission
How does a personal contract purchase work (PCP)?
A step-by-step guide
This is how a PCP works, stage by stage:
1) Selecting a PCP deal
When looking to purchase a car, the dealer or broker will often go through a range of options. This will look at things such as what type of vehicle you are after, your budget and what you want our of a contract – for example, if you want to own the car at the end or switch cars once the contract is over.
2) Performing relevant checks
As with any loan, the lender will carry out a credit check before approving you for a PCP. This is to make sure that you’ll be able to keep up with the monthly payments. However, it’s always recommended that you assess your financial situation independently too, as these payments will make a dent in your salary. Bear in mind too that credit goes on your record – too many credit agreements, and your rating could be adversely affected.
3) Paying a deposit
If you’re approved for a PCP, you’ll then to pay an initial deposit. Generally speaking, this is 10% of the car’s value. Some dealerships (i.e. those who only sell one make of car) may offer a contribution to this, which is typically between £500 and £2,000.
4) Valuing the vehicle
Next, the dealership will estimate what the car is likely to be worth at the end of the contract. The figure that they come up with is called the Guaranteed Minimum Future Value. The amount of the loan is then calculated based on the depreciation of the car’s value (not including the deposit).
5) Monthly payments
All you need to do for the duration of the loan is keep up with the agreed monthly payments. Be aware, these include interest, which is usually set at between 4% and 7%.
As you’re essentially just hiring the vehicle, there are some restrictions in place. For example, there will probably be a limit on the number of miles you can do each year. Damage to the car is another issue to keep in mind, as your dealership will charge you the cost of this when the contract is finished.
7) Options at the end of the contract
When the contract ends, you’ve essentially got three options:
a) Give the car back to the dealer
b) Make a balloon payment to purchase the car outright
c) Use the value of the vehicle as a fresh deposit for your next PCP
How does a PCP work in practice?
Here’s an example of a PCP in action:
Mrs Smith wants to take out a PCP to get a new car. It’s initially valued at £15,000, and the dealer anticipates it depreciating to £8,000 by the end of the two-year deal.
She agrees to the terms, which means she’ll be paying off the difference (£7,000) in monthly payments for the next two years.
At the end of the contract, Mrs Smith decides she wants to keep the car. She’s already paid off £7,000 from when the vehicle was worth £15,000, but the vehicle is now worth £8,000. That means that she must pay another £8,000 to make the car hers.
Benefits and drawbacks
Here are the advantages and disadvantages of a PCP:
- It’s one of the only ways to drive the latest model of car, without paying a large sum of money upfront.
- You’ve got options at the end of the contract – to buy the car outright, return it, or get a new one with a fresh PCP agreement.
- The monthly repayments are usually cheaper than other forms of loan (e.g. a hire purchase agreement).
- The costs remain the same each month, which makes it easier to budget for.
- You’ve got the option to update your car every two to five years.
- The balloon payment total is agreed at the start of the contract. That means no nasty surprises at the end.
- You may hand the vehicle back once you have paid 50% of the loan under the voluntary termination rule.
- It’s a credit agreement, and if you’ve purchased too many things on credit, it can adversely affect your rating. This could make it harder to take out a loan in the future.
- The car doesn’t belong to you, which is stressful if you damage it, as you’ll have to pay for repairs at the end of the contract.
- You’re usually limited to a certain number of miles per year.
The balloon payment is often a large sum of money, and might be unaffordable for some.
What are the differences between PCP and HP?
What is a Hire Purchase?
HP is similar to PCP in the fact that you make monthly payments towards the loan and don’t retain any ownership rights to the vehicle until the final option to purchase (OTP) fee is paid. This OTP fee is often vastly lower than the final payment on a PCP as you will have made larger monthly payments to cover the true cost of the vehicle price, not just the depreciation. These agreements are often sold to customers as PCP agreements, even when it may not have been suitable to do so. The mis-selling of PCP or HP is entirely dependent on your circumstances and needs, as explained in an example further below.
PCP agreements are ideal for customers who enjoy regularly changing their car for a newer model without having to worry about negative equity. However, you will have an agreed mileage limit you must operate within in order for the guaranteed future value to be valid at the end of the agreement. If you exceed the agreed limit, you will be charged for every mile you drive above it. These charges can vary from 3p to as much as 72p per mile. To put that into perspective, driving just 1,000 miles per year more than you signed up for over three years at a 72p per mile charge could see you hit with more than £2,000 in charges.
HP agreements are ideal for customers who want to own their vehicle at the end of the agreement or are purchasing collectable or classic cars with strong residual values, such as limited production models. Unlike a PCP, there is no mileage limit on the vehicle at the end of the agreement, allowing more flexibility in the use of the vehicle. You will also typically pay more per month on HP than a standard PCP as you are paying more than just the depreciation of the vehicle.
Many HP agreements will carry an option to purchase fee in order to take ownership of the vehicle. You will not be given a guaranteed future value when you acquire the HP so you will be liable to pay the agreed final payment regardless of the vehicle’s value. Although the Financial Conduct Authority give lenders guidance on how high this charge can be, there are no set limits and can often be unjustly high.
To find more about Hire Purchase (HP) and how a HP agreement is mis-sold, visit our HP mis-selling guide
What is financial mis-selling?
In its broadest terms, financial mis-selling is said to have occurred if:
- The dealer failed to explain the deal properly to you
- They offered you a loan that wasn’t appropriate for your specific requirements
- They didn’t present you with the full range of options
- They didn’t talk you through any of the extra fees etc.
- They didn’t go through the risks associated with the loan
Financial mis-selling is a serious issue, and cases are on the rise. Sadly, this is particularly the case with PCPs. As such, it’s important to identify whether or not you were mis-sold to, and to take action if you were.
How is a car PCP mis-sold?
Here are some examples of how you might have been mis-sold a PCP:
1) You were told it was a better deal for you, when it wasn’t.
With PCPs, you’ll end up paying more in interest than you would with another loan (like a hire purchase contract). If the dealer didn’t explain this risk to you, you could end up with a larger-than-expected interest bill at the end of the contract.
2) The loan wasn’t explained properly.
In their recent investigations, the FCA found that many dealerships weren’t adequately explaining the details of the contract. This meant that consumers were signing up for a loan, without being fully aware of the terms and conditions. Another common complaint is consumers mistakenly believing that they own the car, because the nature of the agreement hasn’t been explained to them properly.
3) You were offered a deal that benefitted the dealer more than you.
The FCA found that some dealership commission arrangements incentivised staff to favour loans with higher interest rates. This may not benefit the consumer, which means it’s a clear-cut case of mis-selling.
4) You were offered an add-on that you didn’t need.
Some dealers offer additional products (such as insurance) to their customers. These products may be of no real benefit, and only sold to you to generate additional profit for the dealershi
What to do if you have been mis-sold PCP
Firstly, it’s important to identify exactly what you think the dealer has done wrong. Gather any evidence that you have (for example, written correspondence like an email), as this can be used to support your case. The contract itself is another useful document, especially if your actual experience of the PCP differs considerably to what’s written on paper.
If you don’t have solid evidence, don’t panic, as you may still have a case.
Some people choose to lodge a formal complaint with their dealer. Most dealerships have an official complaints procedure, and you might be able to come to a satisfactory resolution. However, if their response is inadequate, it’s time to take things further.
Goodwin Barrett are experts in claiming compensation for victims of mis-selling. Over the years, we’ve helped thousands of people to claim back money, and we’re here to fight against unscrupulous lenders.
It’s a simple process – if you think you were mis-sold car finance just get in touch, and one of our team will get back to you swiftly to discuss the matter further. You can call us on 0808 163 1659 or request a call-back by completing our online form.