Paul Lewis: How you could end up paying way more than you bargained for on a PCP car finance deal

There is a growing number of lawsuits alleging misappropriation of funds used to purchase a car. The most common form of finance offered by dealers is the Personal Contract Purchase or PCP. This is a smart signal. You want a nice, shiny new car, but you can’t even afford to pay for it with a loan.

With PCP, your monthly payments don’t buy the entire car, but simply cover the loss in value over three or four years. This makes it about half the price per month than buying the entire car. When the contract ends, you return the car. Or you can keep it in exchange for a so-called “balloon payment” equal to its current value. Or you can use that amount as a down payment on another shiny, brand new car from the same stable.

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There are concerns that sometimes the complex terms and conditions that apply to PCPs are not clearly explained to clients.

Buying a car (of which PCP is a form) had the fourth highest number of complaints to the Financial Ombudsman Service in 2022/23, with a total of 11,446 complaints made and almost four in ten were upheld. This is almost double the previous year and the trend continued in the first three months of this financial year, with the number of complaints increasing by 74 per cent compared to last year.

Elaine Walker, legal director at Legal UK Services, which accepts claims from clients in exchange for a share of compensation won, says these complaints could soon rise to the top of the list and expects there will be 20,000 this year.

In July, the Ombudsman reported that the majority of complaints about car finance are now made through claims companies, which may be responsible for the rise in complaints. Claims companies may charge their clients between a third and half of the damages recovered. The Ombudsman emphasized that no one is obliged to hire him and he has instructions on how to do this himself.

The most common complaint concerns fees. Until January 28, 2021, when the Financial Conduct Authority banned it, car dealers often earned extra commissions by offering deals at higher interest rates. If the customer believes they are being affected, they can file a mis-selling claim and claim back the interest they paid. But fees, which average £1,100 per trade according to the Financial Conduct Authority, are just one of PCP’s problems.

Problems with the control panel

• You’ll need a large down payment – perhaps 10 to 20 percent of the car’s price.
• The interest rate advertised may not match the interest rate you receive. Any weakness in your credit score means a higher interest rate and sometimes a larger down payment.
• The car doesn’t belong to you
• You pay all current expenses: insurance, services, repairs and, of course, any fines.
• You can only travel a certain number of kilometers. If you exceed the limit, you will be charged a fine of 10 to 30 cents for each additional kilometer. Just a few extra miles per day can lead to big unexpected costs at the end of your contract.
• After three years, you return the car and start all over again.
• If you want to keep the car, you will need to make another payment equal to the current market value. This could be as much as all previous monthly payments combined.
• If the car ends up with even the slightest stain or damage, you’ll have to pay for the repairs. It’s always best to get even minor dents or scratches repaired before returning the car, otherwise you’ll end up with problems with the dealer’s chosen repair shop, which will almost certainly be expensive.

Be wary if sellers entice you to lower your monthly payments by lowering your mileage limit. If you agree to drive just 8,000 miles a year instead of 10,000, your monthly payments will be slightly lower, but the cost of the extra mileage will be higher, so a few extra miles per day can offset the savings.

Sales reps earn a commission for selling optional insurance, covering everything from alloy wheels or paint to rupture insurance to cover loss of value if you’re unlucky enough to sell the car in the first few months. The correct answer to these additional insurance policies is “No, thank you.”

A salesperson selling a PCP must evaluate whether the customer can afford the deal. Debt counseling organizations say it is often done poorly, with people who cannot afford the repayments being persuaded to sell the debt. When payment is due, you lose the car. If you can prove that availability was mispriced, you can make a mis-selling claim.

For people who can afford the payments, comply with mileage limits without compromising, and understand how the business works, PCP can be an affordable way to finance a car. But everyone else should be very careful.

More information about the Car Finance Commission can be found at www.financial-ombudsman.org.uk.