A review from by the Financial Conduct Authority (FCA) has highlighted their concerns surrounding personal contract purchases (PCPs) – which is currently used by around 90% of people who buy cars in Britain.
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.
The FCA’s report highlighted two main areas of concern. The first is that many car buyers are sold a deal at a higher rate of interest than necessary to maximise commission on the sale. It has emerged that car dealers can very loosely change the APRs of car finance products; and some will have the desire to overcharge to earn more commission. Second, a lot of motorists are being talked into unaffordable deals, whilst being told that it is a good deal.
The investigation showed that over a 4-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 claims deadline in place. This will no doubt appeal to the many claims management companies (CMC’s) looking to divert their resources from PPI to new products.
A start-up based in Bournemouth 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 4-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, 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.”