Over the last ten years, a large number of motorists have turned to personal contract purchase (PCP) as a way of buying a new car without paying the full price up front.
Under PCP, drivers pay a monthly fee against the price of a car, which is effectively loaned rather than bought. The payments cover depreciation in the car’s value. At the end of a three or four year period, customers can either purchase the car or return it. Many simply start the process again, allowing them to have a new car every few years without a large cash outlay.
Introduced a decade ago, PCP now accounts for nearly 90% of new car sales. Car finance is the second largest loan sector in the UK, after mortgages. Finance schemes such as PCP are a major factor in the recent increase in sales of new and used cars.
Now, however, there are fears that a slump in the UK’s economy could leave many PCP customers unable to keep up their repayments, with the result that their vehicles are repossessed by the loan company. As well as those motorists left in debt and without a means of transport, a PCP crisis would also affect the motor trade, leaving dealers in new and used cars with a glut of vehicles they will find it difficult to sell in a poor economic climate.
The Bank of England’s financial policy committee has expressed concern over the growth of credit arrangements and borrowing in the UK, which could leave millions of customers exposed to the risk of repossession. The Financial Conduct Authority (FCA) has begun an investigation into the motor finance industry.
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The chief concern is that customers may have been mis-sold their finance schemes by salespeople who have not properly explained the terms of such a loan, or the possible risks. It is also thought that some drivers, especially those with lower incomes who cannot afford to purchase a car outright, may be paying too much over the course of a loan.
Under British law, anyone who takes out a loan must be aware of all the associated terms and conditions, including exactly who they are making the arrangement with, and what will happen if they default on payments. Some customers will take out loan protection, an insurance policy against unforeseen circumstances which might prevent repayments being made, but others choose not to, or simply cannot afford the extra cost.
If PCP deals are found to have been mis-sold, car dealers offering finance packages will be forced to take responsibility for their customers’ losses, as well as for the repossessed vehicles on their hands, at a potential cost of millions of pounds.