Stephen Dawson, partner at Shoosmiths, questions whether customers are as well informed as they should be when it comes to the realities of a PCP agreement

In this article I am asking a deliberately provocative question: I am daring to challenge whether or not consumers are sufficiently well informed – or interested? – to make an appropriate decision as to the most appropriate type of finance to use when buying a car.

Could the huge success of PCP in driving new car sales over the years be at odds with the low percentages of people actually paying the final balloon payment to purchase their car? Is the UK becoming a nation of ‘users’ and not ‘buyers’, and are sales channels keeping up?

It’s all in a name

I am going to begin with a suggestion that ‘personal contract purchase’ as a description for a financial services product means little or nothing to an average consumer. And just to go even further, I suggest that it’s also fair to say that many of the more high street ‘brand names’ used to market PCP products are even less descriptive and therefore useful for consumers.

To market a comparatively complex financial services product with a brand name that has little or no bearing on its true nature and operation, increasingly seems to contradict everything we are all doing to make advertising clearer and more transparent, to make agreements easier to understand, and terminology more straightforward. After all, we wouldn’t be allowed to market an apple, and call it a banana with options.

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The basics

If you’re reading this article, the chances are that you work in the financial services industry, and probably the motor finance sector. So, the idea that a PCP agreement is essentially a hire purchase agreement with three options is not a new concept to you.

As a reminder, the options are:

(i) Hand the car back at the end and walk away;
(ii) Hand the car back at the end, and if the residual value exceeds the guaranteed future minimum value shown in the agreement then you have some equity (i.e. cash) that you can use towards a deposit on your new car; or
(iii) Pay the balloon payment (i.e. the typically very large final payment) and own the car.

All very simple.

The alternatives

As an alternative to PCP, and particularly if the car is a used vehicle, perhaps a consumer simply wants to buy his or her car by way of cash. No credit and no hire. Or a third-party motor loan, for example?

Alternatively, perhaps the dealer suggests a funder who only offers conditional sale. Or only offers traditional hire purchase. Or maybe the consumer is asked which one he or she would prefer.

If that does not appeal, and a nice new car does, perhaps the consumer would prefer to hire the car on an increasingly popular product known as personal contract hire (nicknamed PCH, which seems alarmingly close to PCP). So no credit, just a simple hire product giving effectively a ‘right to use’ for a period of time, subject to mileage limitations and return conditions.

And would you like servicing and maintenance with that Sir/Madam?

It’s all very confusing, and as a veteran of the garage forecourt, my own personal opinion as to the virtues of one product over the other have swayed wildly – I currently favour personal contract hire, for now.

The real benefit

The real benefit of PCP – which the technicians among us will appreciate is simply a form of depreciation finance – is that monthly payments are kept at a more manageable level than traditional HP, with the flexibility to simply walk away at the end, or make the balloon to acquire title.

It effectively offers a cheaper way to drive a new car. And who can be bad to that?

Let us take an example

In order to best lay bare my specific concerns about PCP, let us compare the manifestly different financial consequences of choosing PCP and PCH.

I have obtained a PCP quote for a popular SUV with a cash price of a little over £47,000. I pay a deposit of £8,000 and 36 rentals of £499. Assuming I stick to 10,000 miles per annum, I then have an obligation to pay around £27,000 if I want to keep the vehicle on this so-called ‘purchase’ plan.

As an alternative, and if I never want to purchase the vehicle but instead like the idea of simply using it, and then handing it back, I can pay a £6,000 advance rental, 36 payments of £499 and all of this subject to a maximum of 10,000 miles per annum.

The reality here is fairly simple to see. Customers might be significantly better with a ‘use’ i.e. hire product if there is no reasonable contemplation of having £27,000 to pay a final balloon payment.

And the statistics point to very many people simply handing back and walking away when faced with a hefty final payment.

So what is the issue?

I am a firm believer in the appropriate use of financial services products in their correct way, to enhance or improve personal cash flow. I do not think I am alone in saying that using finance products properly can help people to save more, protect cash lump sums and drive nicer cars!

So I do not oppose HP, conditional sale, PCH, PCP and all the rest. I applaud them, when used and understood correctly.

My great and personal sadness is that the huge success of PCP – in the context of new cars at least – and its marketing appears to conceal the one difficult truth: Few people can afford the final balloon, or indeed ever intend to pay it.

For this reason, consumers can or should be better advised to look at alternative product types – which may be starting to fuel the undeniable growth in personal contract hire, for example.

The last time I bought a new car though, I had to ask for personal contract hire – it was not offered.

Of course, no article of this nature would be balanced if I did not refer to all of the benefits of hire purchase or PCP over leasing, including the full range of consumer credit directive protections, pre-contractual information and rights of voluntary termination. I do accept that consumers’ rights are robustly protected with these credit products.

Returning to my contentious opening statement, I do however feel that there is an inequality in protections under credit and hire, a severe lack of clarity for consumers in terms of how all of the products work when compared to each other – particularly where not all are available from the same dealer – and a massive lack of consumer due diligence. <