A review earlier this year from by the Financial Conduct Authority (FCA) has highlighted concerns surrounding the UK’s most popular car finance method – personal contract purchases (PCP).
PCP is currently used by around 90% of people who buy cars in the UK every year. This type of car finance is designed to provide motorists with affordable monthly payments, followed by a balloon payment at the end if the customer wants to purchase the car outright.
However, investigations into the industry by the FCA has highlighted two main areas of concern. Firstly, car dealers can very loosely change the APRs of car finance products to potentially earn more commission. Second, a lot of motorists are being talked into deals lacking transparency and are left with a balloon payment which is often unaffordable.
The investigation showed that over a four-year term, the average customer was overpaying around £1,100 in interest, or sometimes more. In addition, the HMRC has decided that PCP payments will need VAT charged to them, making it even costlier for motorists.
The FCA are currently reviewing a PPI style claims process for PCP payments – where claimants may be able to earn a full refund of up to £1,100, perhaps with a deadline in place.
A Bournemouth-based startup has highlighted the problem with PCP payments and has opted to sell more hire purchase instead.
A spokesman from Quick Car Finance explained: “The problem with PCP is that your circumstances can change over a four-year period – whether it is your income or you do significantly less mileage than anticipated. The result is that you find yourself with a negative equity and an inflated balloon payment still to be paid. It’s a bit of a lost cause.
“When we offer our customers hire purchase on our website, they know how much they are paying for their car each month based on their affordability and will eventually own it.
“Our car finance product starts with affordability and credit status. We determine what the budget is of the individual and how much they can afford and present them with a list of options. The lender provides one rate and we do not have any say over this – so the customers get the best rate possible, no matter what our commission is.”
Matt Sullivan of Kramer Sullivan commented: “PCP claims could be a huge thing in 2021 and 2022 – it is still early days and there is no real framework around it yet, but millions of people will potentially be able to claim up to £1,000 each.
“For too long, people have been going into car dealerships, buying the same car and coming out with very two different prices – and no one has really questioned it. Of course, there are things like credit checking and affordability, but beyond this, commission-driven deals have overtaken transparency in the market and it needs to be addressed.”