Financing your car with PCP – is it right for you?

We’re incredibly fortunate and privileged to be living in an age of sheer convenience.

Everything we do, particularly buying just about anything, is easier, more clear-cut and immediate.

Take, for example, buying your car insurance. Those of a certain vintage will still remember trawling through the Yellow Pages for numbers of as many insurers as possible before spending hours giving the same information time and time again to each company.

It was laborious and time-consuming, and these days even a meerkat with a moderate grasp of English can find you the best deal for your wheels, in a fraction of the time.

CALL ORDER: Ringing round the insurance companies for quotes used to be a frustrating and lengthy process

And it’s a similar story when you want to get a new vehicle to insure in the first place.

Obtaining motor vehicle finance is far, far easier than it was. It’s no more taxing than renewing your mobile phone contract, for example.

Seemingly inexpensive financing deals mean drivers can get behind the wheel of a new car and pay for it with cheap payments made monthly for, typically, two to four years. What is important to note is that ‘buying’ a car using PCP isn’t quite that – the driver doesn’t take ownership of the car until he or she pays an outstanding ‘balloon’ payment at the end of their leasing term.

This represents a huge shift from the way we used to fund new cars, such as privately-obtained loans or cash. And it’s not difficult to see why those opting to use PCP are doing so. Obtaining finance on a vehicle is quicker than before, and the arrangements are attractive to motorists who want low monthly payments.

Eight or nine of every 10 new cars coming out of UK showrooms and hitting the roads are funded by finance packages, mostly PCP deals.

Of course, these deals aren’t, by definition, illegal. Far from it. It’s a perfectly legitimate way for dealers and motorists to strike deals. It is only the methods of the salespeople involved that is a cause for concern. 

SALES DRIVE: Making it easier to obtain finance opens up the range of cars on offer to motorists

PCP can be an effective way to keep on top of managing your vehicle’s running costs. 

Here’s how it works.

You pay a deposit, and arrange for a set number of monthly payments, which would be lower than a hire-purchase deal.

At the end of the term, which is usually two, three or four years, there will be an outstanding ‘balloon’ payment due. It should be more or less equivalent to it’s retail value at the end of the term. Often this is also known as, or is at least related to, a ‘guaranteed future value’ though this can change according to the car’s condition and the miles on the clock at the end of the term.

The amount due on the balloon payment should be pre-determined at the outset and relies on factors such as staying within a pre-set annual mileage and ensuring it’s regularly serviced.  

At the end of the term the customer has three options: 

  1. Give the keys back to the dealer and walk away with nothing more to pay.
  2. Make the balloon payment to take ownership and keep the car.
  3. Trade it in and use any equity to start afresh with a PCP deal on a new car.
TELL ALL: Dealers should give their customers a true and honest picture of the deal they are signing up to

PCP packages are generally sold on the understanding that there will be equity on the vehicle at the end of the agreement. This means the car should be worth more than the final balloon payment and the difference can be used as a deposit towards your next car.

But the reality is that this is rarely the case.

Most PCP customers find that the value of the car (and remember – it only becomes the customer’s property once the balloon payment has been made) has depreciated and it isn’t worth the final payment. 

So the decision then becomes a choice between paying over the odds for a three or four-year-old car or – after forking out for a deposit at the start of that term – having to find money for another deposit to enter into a PCP agreement on a new car.

Tips to getting a deal on your wheels

1) Shop around and compare the PCP deals available
Comparison sites allow you to easily compare a range of options, involving numerous dealerships. Work out which models and specifications attract you then decide on the deal that best suits you. Don’t commit to anything unless you’re sure it’s the right deal for you, your needs and your budget.

2) Get a grip of APR interest rates

The Annual Percentage Rates determine the interest you’ll pay on your new wheels. Those with a near-perfect credit rating can expect to pay between 6% and 11% on their vehicle. For less credit-worthy customers that interest rate can climb to anywhere around the 20% mark. If you can improve your credit score that will help your ability to get a better deal on the car you want.

3) Look for deposit contribution deals
Many dealers offer what appear to be decent deposit contributions on finance deals – up to a couple of thousand pounds in extreme cases. And that could make a massive difference to monthly payments on a car. These aren’t discounts, however – they rely upon you signing up to the PCP deal so, if you’re a cash buyer, you won’t qualify and you need to work out what the best deal is.

4) Shop around the used car market
PCP deals are so popular among motorists and getting a used (or nearly-new) vehicle can lower the monthly payments even more. Cars tend to depreciate in value in their first few years and so financing a two- or three-year-old model instead of a brand-new one could mean you unearth a real gem.

5) Get the right balance between your deposit and leasing term
If you want to pay the lowest amount in interest then a higher deposit and shorter contract length are the best way to do this. However, not everyone has that option. If, for example, you don’t have a huge deposit saved up and you want to keep the monthly payments low too, you can spread the payments over a few more years. The downside to this is that you’ll be paying more interest over the term of your PCP contract.

Dealers will generally contact you towards the end of your term – they’re keen to keep your business, after all. 

And they’ll want you to either make the final payment and take ownership of the car or enter into a fresh PCP deal for a new car. This option will probably contain some kind of a sweetener as, if the car is worth more than the optional balloon payment, you’ll be able to put the difference towards a new vehicle and they’re keen to get your business all over again.

At this point what you do about the car depends upon you and your circumstances. Weighing up the good and bad of each option will help you to decide the best course of action.

The options, and the basic pros and cons of them, are:

Option 1: Return the car and walk away

This means you’ll not be making any more payments, including the final balloon payment that will finally grant you ownership.

However, handing the car back and walking away means not only do you have no car, you will also lose out on any value remaining in the car had you paid the final balance.

You will also be liable for any charges for exceeding the agreed mileage or for wear-and-tear damage if there is any.

Option 2: Make the final payment

This means that, after years of driving the vehicle, you finally become its owner and you can choose what to do with it, whether that’s keeping it, selling it in or looking to trade it in.

You may be financially better off but this depends upon the rise and fall of used car prices at the time.

That final payment is likely to be significant and beyond the readily-available funds most UK motorists have at their disposal. Those that don’t but who want to keep the car may have to use further finance and will therefore continue paying interest on the amount owed.

Option 3: Trade the car in and use its equity

This option means the value left in the car can be put towards the deposit on another PCP deal. The value of the vehicle should be high and that will affect a new PCP deal with lower monthly payments. You’ll also have the option to switch to a newer model, one that you may feel suits your needs better. If you have negative equity, though, your choice of new vehicles will be limited as you’ll have to find a new dealer, and having to find one that is willing to pay the settlement might cut down your options.

HONESTY IS THE BEST POLICY: Sales agents at car dealerships have a duty not to mis-sell PCP finance deals

Despite the horror stories we’ve all seen in the mainstream media or that regularly feature on TV consumer shows, car dealerships are generally reputable outfits who run their businesses in an honest fashion.

And PCP financing can be a great way to get behind the wheel – after all, four fifths of new cars in the UK have been obtained using such methods – but motorists need to be careful when faced with salespeople keen to tie them down to deals.

If you think back to when you were sold a PCP finance package, are you sure you were not mis-sold the deal?

At Barings Law we’ve seen countless instances where the seller has been more interested in arranging a package, and not necessarily the right one for you.

Was the vehicle or the financial product misrepresented? Have you lost money because of the advice you were given in the showroom?

In addition to instances of misrepresentation by your dealer or salesperson, you may have been mis-sold your PCP deal because:

  • You were told the car would be worth more than the balloon payment when clearly that was not likely to be the reality.
  • Your dealer did nothing to ensure you could afford the finance payments.
  • You weren’t told about the risks of PCP deals, the penalties involved and the chances of you having negative equity at the end of the term.
  • The interest rate and total amount of money you will pay were not clearly outlined.
  • You were not informed about other, perhaps more cost-effective, ways of funding a vehicle.
  • You were assured by the dealer that the make and model of vehicle would meet your needs when this was clearly not the case.
  • Your monthly payments were kept low by the dealer vastly over-estimating the vehicle’s balloon payment with an unreasonably low annual mileage limit, one that was never likely to be realistic.

If you suspect your PCP financial package was mis-sold to you, isn’t it time you took action to redress the balance?

Barings Law can help you get back what you have lost through no fault of your own. Call our customer service operatives on 0161 200 9960 or by clicking the webchat icon at the bottom right for a no-obligation chat about your PCP finance deal, and see if we can help you put in gear a claim for compensation.

Our legal experts work on a no-win no-fee basis, meaning there’s no financial risk to you, so you’ve nothing to lose.