The FCA is investigating personal contract purchases (PCPs) following soaring complaints which prove that some car finance players are engaging in unfair practices. Complicated car loans offered to unsuspecting customers by pushy salesmen are leaving thousands with deals they can’t afford.
The car salesmen behind this rip-off car loans are so eager to offer these lucrative loans popularly referred to as PCPs that buyers aren’t being offered enough time to understand critical details.
According to Stuart Masson of car advice website TheCarExpert.co.uk, customers are being offered one-sided stories about how great personal contract purchases are. Masson feels these deals aren’t bad when fully understood; however, they have become a popular way to buy cars, yet they aren’t the best option for most people.
PCPs have become increasingly popular to the extent of catching the FCA’s attention. The regulator has even launched an investigation and is expected to publish details on the same.
Negative equity trap
With PCPs, car buyers put a deposit before taking out a loan matching the cost of the car plus interest. However, every month, customers repay the difference between the estimated worth (3 to 4 years later) and the current cost plus interest. When the loan term expires, the motorist can pay a balloon payment (estimated value as agreed when the loan is issued) and own the car or return it and walk away. The motorist can also enter into a new personal contract purchase on a different vehicle.
Until recently, balloon payments on most PCPs were lower than the actual value of the car allowing customers to trade in their cars and use the resulting profit as down payment for a new car. In fact, this was the reason behind the popularity of personal contract purchases. However, the value of used cars has fallen.
Most PCP holders are now paying final payments which exceed the car’s worth. This has forced many to hand over their cars and be left “car-less”. The other alternative is paying a deposit for a new car or overpaying to keep the old car. What’s more: balloon payments attract additional fees. Those who choose to ditch their cars are made to pay for repair or pence-per-mile costs if the car has exceeded the mileage allowance stated when setting up the PCP.
Approximately 66% of drivers now use personal contract purchases to buy cars. According to recent statistics from the Finance & Leasing Association whose mandate is representing the motor finance industry, there has been an 8% increase every year in car sales via consumer car loans in car dealerships.
However, the number of used and new cars sold has only increased by 2%. The average car loan today is £15,115 compared to £14,234 during the same period last year. According to Masson, car dealerships make more profit selling finance than cars. Masson sees this as an industrial scale problem as opposed to a case of customers being stupid. He views PCPs as merry-go-rounds which are hard to abandon without losing your car or money.
A mystery shopping investigation by comparison site confused.com uncovers pushy sales practices with 10% of undercover buyers at car dealerships denied a chance to look for alternative car finance. 6% of buyers in the exercise felt they were being forced to take a PCP immediately. A separate poll conducted by the site reveals 20% of car buyers don’t feel sufficiently informed of what they are getting themselves into.
Increasing complaints in the past four years
Car finance complaints have quadrupled in four years providing enough evidence that the area is a source of concern. According to the Financial Ombudsman Service mandated with mediating fall-outs between customers and lenders in the financial services industry, there has been a sharp increase in hire purchase car loans and PCPs though most car finance agreements today are PCPs.
Complaints have increased from 1,511 back in 2014 to a record 5,805 in March 2018, a trend which isn’t slowing down given 2,031 new cases have been opened by the Financial Ombudsman in the second quarter of 2018. Although some complaints originate from car buyers who should have known better, the latest statistics by the Ombudsman account for 40% of the cases.
PCPs are a classic case of easy credit coupled with complicated rules or what many would call a “rip-off”. According to free online customer complaints service Resolver, the car finance market is in more trouble. The founder, James Walker, finds PCPs “fiendishly complicated” adding that any financial product that has been weighted spectacularly against consumers is unfair. According to Walker, PCPs should be straightforward with no hidden costs or terms.