Business Personal Finance

Tuesday 16 July 2019

PCP may be a worthwhile finance option - but be mindful of the hidden dangers

Some marques are reporting huge increases in PCP deals. (Stock picture)
Some marques are reporting huge increases in PCP deals. (Stock picture)

Paul Merriman

If you’re looking at the possibility of a new 182 motor, and considering PCP, then look a little closer at your finance options.

Consumers, and often the car sales agents selling these plans, are unaware of the hidden dangers of the popular car finance deals.

A PCP, or Personal Contract Plan, is a type of hire purchase agreement where you get a new car for a cash deposit of around 25pc, and agreed monthly repayments, usually spread over three years. 

Repayments are calculated based on the car dealers estimate of what your car will be worth in three years' time, a 'guaranteed minimum future value' and, at that stage, you hand back the vehicle, trade it in for another, or pay off the remainder of the loan and keep it.

PCPs are the fastest-growing form of car finance in recent years, although no one officially knows how many PCPs exist and, crucially, how many customers are defaulting, as the loans are unregulated.

From around 14,000 PCP contracts taken out in 2012, by the end of last year the figure had risen to over 125,000.

PCPs can be worthwhile is some cases, in particular company cars, but they need careful consideration for regular people buying a family car, as, in many cases, they are taking on debts they cannot afford on a product that may drop rapidly in value.

If you can afford a new Audi or a top of the range Hyundai, but don’t want to put all of your money into it upfront, then a PCP could be the deal for you.  But, if a personal contract plan goes wrong, you could end up owing more than the car is worth.

Read more: PCP - good value or an overly complex car 'hire-purchase' deal? Four things you need to know


There are concerns about the fact that the Central Bank does not regulate PCPs.  The regulatory status of the car salespeople offering the deals, (the credit intermediary selling the product), is unclear, as is that of the lender, with whom the customer enters into the agreement.

Where the actual loan sellers are often unaware of complex issues around the product, how can the consumer be properly informed?

A finance company entering into a PCP arrangement with a consumer is under no obligation to assess the suitability of the product for that individual, or, more importantly, their ability to make the necessary repayments; which simply isn’t good.

PCP products mostly come in for criticism on the basis that the thousands of motorists who take out these deals may not be fully aware of the downsides of the contracts.

A PCP will make a shiny new car affordable.  However, if the car's value falls below the agreed amount at the start of the deal, then the equity disappears.


Balloon Payment

The greatest trick the devil ever pulled was convincing us that a 'guaranteed future value' is not a balloon payment, as a sizeable balance is often due at the end of the personal contract plan term.

The consumer could end up with no deposit for their next car.  Yes, you can walk away from the deal, but you will have nothing to put towards your next motor, and no car, despite having paid two-thirds of its value.

Ideally, after three years, the second-hand value of the car should exceed the lump sum owing, the 'guaranteed future value'.  That difference should then allow the motorist to put a deposit down on another new car, without having to put his hand in his pocket.

However, car values and markets are becoming more unpredictable, and are susceptible to all sorts of likely and unlikely influences, from EU legislation to EU exits.

The high level of UK car imports, since sterling dropped, has affected the resale value of many leading marques.

Advice from the car industry is to ensure your guaranteed minimum future value is set on a conservative basis; and yet how many motorists can confidently predict that?

Paul Merriman is a Certified Financial Planner, Founder of and CEO of Pax Asset Management and ClearChoice.

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