PCP car loans: an imminent accident?


The arrival of our first grandchildren (twins!) will result in a purchase I never thought I would make: a family car, now known as Dad and Grandpa’s Taxi Service.

We have done extensive research, established a budget and hired family members to source suitable used models. Yet, unlike most UK car buyers, we do not intend to use a PCP (Personal Contract Purchase) finance arrangement.

That said, it is in fact rare to to buy a car using PCP – most people cancel their finance agreements and get a new engine every three years or so.

It’s a way to hunt for a new or used car that you could never afford to buy outright. By signing what is effectively a hire-purchase agreement with a massive final payment at the end (the “lump sum payment”), drivers have to pay interest on the full amount borrowed, but still have to come up with money if they want to keep the car.

Years of rock bottom interest rates have fueled cheap finance deals, but could the cost of living crisis knock the wheels off?

Credit becomes more expensive on new PCP agreements, which now tend to run for four years. Even people who made contracts in happier times may find that payments of £400 or £500 a month are an increasing burden as the cost of rent, mortgages and household bills rise – not to mention the rising cost of fuel and car insurance.

Stuart Masson, a former car dealership who now runs The Car Expert website, says many drivers regret having “gone big” on expensive PCP deals.

“The auto industry is completely dependent on people buying cars they don’t need with money they don’t have,” he says.

Industry statistics don’t yet reflect significant consumer distress, but judging by the press releases that have popped up in my auto finance inbox, many drivers are already feeling the pinch.

If you have repaid more than half of the total outstanding amount of your PCP contract and can no longer afford it, you can usually return the car without penalty. However, finance companies want drivers to find ways to manage reimbursements and keep their vehicles.

Ford Credit, which has 2 million customers using its Options PCP product, says it is testing a number of solutions that offer greater flexibility to customers as they “navigate potential changes in their financial situation”.

A recent press release from a car loan refinance firm said a 21-year-old North Londoner had cut the APR on payments for his Mercedes GLA from 26.8% to ‘just’ 12.9% , saving him nearly £8,500 in interest. God knows what his insurance bill is!

I threw the tires on it all with Peter Campbell, the FT’s global motor industry correspondent. Although some consumers have signed tempting deals, he thinks the cost of finance is not the right metric to focus on.

“By far the most important factor with PCP agreements is the rate of depreciation you are funding,” he says, noting that global shocks to the automotive industry’s supply chain have caused the value of second-hand cars.

While finance deals are made based on the value of the car after three or four years, many drivers coming to the end of PCP contracts find they have equity in their vehicle because its value has gone less. depreciated than expected.

He uses the example of a BMW with a sticker price of £40,000. “Suppose your contract takes into account a depreciation of £15,000 over three years – that is effectively what you are borrowing to finance,” he says. “Yes, there are interest charges, but if the BMW is worth £35,000 at the end because used car prices are rising, you’re in a good position.”

If you buy the car, this would reduce the value of the “lump sum payment”. However, Masson predicts that car dealerships will trick drivers into turning around and pulling out another PCP on an even flashier engine.

With a long and difficult road to economic recovery, opting for a smaller, less flashy car with lower monthly payments might make more sense.

Used car prices are starting to fall from historic highs, but Peter thinks the huge price hike and long delivery times for new cars will keep residual values ​​going for the next few years.

This could prevent the car finance market from blowing up, but it looks like a happy accident!

I wonder how many people fully understood their PCP contracts when they signed the paperwork in the car showroom, and are now tied to deals they can’t afford.

Dave Ramsey, the American personal finance guru, has a rule of thumb: the total value of all your vehicles should never exceed half of your annual household income (tell that to the 21-year-old with the Merc).

Of course, I expect a few readers of FT Money to be cautious members of the Bangernomics school, using cash, cheaper personal loans, or even 0% credit cards to fund their purchases of vehicles.

But I need look no further than my inbox for another accelerating trend for those looking to purchase an electric vehicle (EV).

Electric vehicles are expensive, but a growing number of employers are offering their staff the option of renting one using wage sacrifice programs.

Paying for a green car using their pre-tax gross income could save employees hundreds of pounds each month in income tax and national insurance payments – an interesting prospect as tax thresholds enter the freeze . There are also attractive NI savings for employers.

According to one supplier, LoveElectric, a higher-rate taxpayer could typically save around 50% by leasing an EV through a wage sacrifice compared to buying a vehicle directly using a PCP.

According to the British Vehicle Rental and Leasing Association, demand for zero-emission automobiles from fleet drivers and employees under wage sacrifice schemes is growing rapidly.

Its members saw a 33% year-over-year increase in electric vehicles supplied through wage sacrifice programs, with 84% of wage sacrifice deliveries going to electric vehicles in the last 12 months.

If you’re tempted, the fall statement confirmed that in-kind benefit tax rates on electric cars will remain at an ultra-low 2% until April 2025, before increasing by 1% each fiscal year. until 2028.

Wait times for delivery are around 7-12 months, but with this kind of savings, paying the road tax which will soon be introduced will not be a big problem.

Claer Barrett is the FT’s consumer editor and author of ‘What They Don’t Tell You About Money’. [email protected]; Twitter and Instagram: @Claerb

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