Risks of buying your car with PCP via Personal Contract Purchase
Car finance deals can help you hit the road cheaply, but there are risks, says Paul Lewis
The most popular way to buy a car is via Personal Contract Purchase (PCP), but it’s also a top subject for complaints to the Financial Ombudsman Service. In 2022/23, over 11,000 complaints were made about motor finance deals such as PCPs, which put them fourth in the top ten products. Most PCP complaints are made by claims management firms, who keep around 40% of compensation, so the Ombudsman recommends people make claims themselves.
PCPs enable people to drive a new or quality second-hand vehicle for about half the cost of buying it. Instead of borrowing money to pay the full price, the customer just borrows what’s needed to cover the depreciation in its value over the period of the contact – usually three or four years. After that, they can just give the car back, or they can use its remaining value as the deposit on another vehicle on a fresh PCP contract. The third option is the expensive one: buying the car for the full value of the three- or four-year-old vehicle.
Many things can go wrong with a PCP, but claims firms concentrate on secret commission. Before 2021 car dealerships used to earn extra commission from PCP-supplying lenders by offering customers deals at a higher interest rate than what was necessary. They called it Difference in Charges and it accounted for three in four sales in the middle range of prices. The Financial Conduct Authority banned this practice from 28 January 2021, but customers who took out a PCP before then can claim mis-selling and recover the interest paid.
Other complaints relate to the penalty at the end of the deal if you have exceeded the maximum stipulated mileage. If the penalty mileage rate was not clearly explained – it can be up to 30p for each extra mile – or if you were persuaded to agree to a lower mileage limit to reduce the monthly payments, that could be mis-selling. As could failure to explain the high repair costs if there is the slightest mark on the vehicle, or if you were sold unnecessary insurance as part of the deal.
The Financial Ombudsman Service has useful guides. Search “car finance” on their website: financial-ombudsman.org.uk
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