Is the sky really about to fall in for PCP car finance?

Car finance advice
PCP car finance in crisis? (The Car Expert)

How can the system be improved?

Unsurprisingly, the car industry is happy with things as they are, and has no interested in reforming the system to make life better for customers.

However, the FCA has already introduced new regulations for selling GAP insurance which could provide a guide to how car finance sales could be improved. Since September 2015, car dealers are not allowed to sell GAP insurance as an add-on on the same day they sell a car. From the day GAP is first discussed, there must be specific written information provided to customers and then there must be two clear days until a buyer can actually purchase GAP insurance for their car. So if you are discussing GAP insurance for your new car on a Monday, the dealer cannot sell you GAP until Thursday.

The regulation of GAP insurance was implemented to stop widespread price gouging on by dealers all across the country, to a captive customer who often had never even heard of GAP. A similar principle could be applied to car finance.

There is no reason (apart from obvious resistance from the car industry) that a 48- or 72-hour period could not be mandated between providing a formal car finance offer and signing an agreement. Similar advice material could be provided to buyers, just as now happens with GAP insurance sales, allowing buyers to make a more informed decision about their purchasing plans.

An alternative option, which would encounter even more resistance, is mandating a proper cooling-off period that applies to both the finance agreement and the vehicle sale. A PCP car finance agreement, like any other finance agreement, has a 14-day cooling-off period whereby the borrower can cancel the contract without penalty. That’s all well and good in theory, but it’s not that simple.

Most car sales agreements do not have any cooling-off period, so cancelling your PCP simply means you then have to pay for the car in cash. Given that people tend to use a PCP because they don’t have the cash to pay for the car, the current cooling-off provision is meaningless. If buyers were able to cancel their PCP and return the car as well, dealers would be far more careful about how they sold the product in the first place…

Spares or repair - dodgy car dealers use all sorts of tricks

“Nah, the system’s perfectly fine as it is.”

But is the current media storm going to lead to a brighter future for car buyers, or will it simply blow over with no real improvements? And will the economy come crashing down if PCP car finance deals suffer?

So what will really happen to how PCPs are sold?

Contrary to the tabloids’ sensationalist headlines, there is unlikely to be any great crisis if there is a crackdown on PCP sales tactics. In fact, there are already some brands and dealers who are gradually starting to move away from PCPs.

What will happen is that finance companies will simply shift their efforts to other finance methods, like leasing, rather than PCP offers. Leasing is much less transparent, and conveniently avoids most of the legal obligations and consumer rights associated with purchase agreements like PCP and HP (hire purchase) finance. That’s great for dealers but even more disadvantageous to customers.

Other finance mechanisms, like peer-to-peer lending schemes, have been growing in the sub-prime market in recent years as well, so there will always be ways for people to finance cars. But, just like the crackdown on payday loans led to an increase in logbook loans, that doesn’t mean it will lead to a better outcome for consumers.

Additionally, the growth in online car sales is likely to weaken dealers’ hands in pressuring customers to take finance. As more manufacturers start offering buyers the option to conduct every aspect of their car purchase online, it becomes easier to ensure that the rules and regulations are actually being followed. Customers will have to click to download documents, and confirm that they have read and agree to the terms and conditions. If they choose not to read those documents, that’s not the seller’s problem.

Tougher car finance rules could well have a significant impact on the car market. But if a significant chunk of today’s car sales are being made on terms that are unfair to consumers, why should it be allowed to continue? Consumer rights should always take priority over corporate profits, and the scare-mongering from the car industry is simply evidence that this is not currently the case.

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Stuart Masson

Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

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