Recent articles in the national press warning of ‘negative
equity’ for customers on personal contract purchase (PCP) schemes
have been criticised by motor finance experts for their potential
to mislead the public.
The Daily Telegraph and Daily Mail both published articles on
January 6 warning that motorists coming to the end of their PCP
agreement term could find themselves in ‘negative equity’, with the
vehicles currently worth thousands less than the residual values
(RVs) calculated when the contract was signed.
The articles were prompted by a report in car magazine Auto
Express, which said that the shortfall between predicted and actual
RVs could cost UK motorists up to £272m – although it was not
immediately clear how this figure was calculated.
The implication in all three articles is that shortfalls in RVs
will leave PCP customers ‘out of pocket’ – even though it is the
finance company which will swallow the loss, if a PCP customer
decides to hand the car back instead of opting to pay the balloon
Motor finance broker Graham Hill said: “[The articles] are
strongly recommending that people don’t take PCPs, which allow them
to pass over the huge [RV] losses to the funders.
“It’s criminal to give the impression that PCPs are creating
losses for the customers – in the cases shown, the customers have
saved a fortune,” he added.
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Remarks attributed to the Finance & Leasing Association
(FLA) were used in the original Auto Express article and repeated
in the national media – but the association complained to the
magazine that its comments had been misquoted.
The spokesperson said: “The FLA is disappointed with Auto
Express’ inaccurate comments. Our view is that PCP offers great
flexibility to consumers. At the end of their agreement, they have
the option to pay the balloon payment to own the car outright,
trade the car in and put any equity towards a new car, or simply
hand the car back to the dealer.
“Consumers are in a great position as many of the risks
concerning a vehicle’s future value are carried by the finance
PCP is growing in popularity among consumers, according to FLA
figures, which show that over the past year, PCP was used to
finance 47.8 per cent of new car purchases and 23.8 per cent of
used car purchases – growth of 7 per cent and 23 per cent
respectively on the previous 12 month period.
Negative equity: Showroom showdowns
Over recent “good” years, dealers found it fairly easy to set
the minimum guaranteed future value (MGFV) of new cars since
fluctuations of used car prices were predictable and marginal. This
has now all changed. EurotaxGlass’s has calculated that the average
monthly drop in used car values during 2008 – at 3.5 per cent – was
almost double that recorded during 1992, the low point of the last
recession. The average three-year-old car is today worth some
£1,750 less than an identical car of the same age in January
One automotive broker told Motor Finance that much aggravation
is being caused in the showroom between PCP customers and lenders.
This is because in the past borrowers have found that their cars
were worth several thousand pounds more than the MGFV at the end of
the agreement. “There was invariably sufficient equity in the
vehicle to put a deposit on another PCP deal,” he said.
However, cars are increasingly worth far less than the residual
value calculated at the commencement of the agreement so customers
have either to relinquish the car or end up paying a final payment
that is more than the value of the car.”
As an example he quoted the purchase of a 12-month old Renault
Espace in 2007 with around 10,000 miles on the clock. “This would
have cost around £21,000,” he said. “A PCP dealer would assume that
the car would depreciate at about 13 per cent each year and be
worth in the region of £15,900 after two years when the car came up
to be changed. However, now the residual value of the car could
have fallen to around £13,550 – causing a potential negative equity
of some £2,350 if the customer decided to buy the car.”