Looking through the huge number of media reports on the “car finance crisis” allegedly gripping the country, it’s amazing to see how many people fundamentally misunderstand how PCP (personal contract purchase) car finance works – and that includes reporters and editors at major media institutions.

With both the Bank of England and the Financial Conduct Authority (FCA) announcing investigations into the car finance sector, there has been plenty of reporting from both mainstream and specialist media.

Given the size of the car finance market in the UK (approx. £40 billion) and the number of private car buyers who take out a PCP to fund their purchase (up to 90%), it is astonishing how many errors are being made by major media outlets when trying to explain the situation. Here are some of the most common and important issues that have been misreported.

A PCP is a purchase, not a lease or a rental

Perhaps the biggest misconception about PCPs is the repeated assertion that you are leasing the vehicle rather than buying it. This has been widely reported and repeated, and is not helped by some finance companies and others who should know better referring to a PCP as a “personal contract plan“, rather than the correct “personal contract purchase“. Again, this has been widely repeated by the media without properly looking at the detail:

  • “Instead of buying a car outright, a PCP allows you to rent the car over a three-year period.” – BBC
  • “(A PCP) allows the buyer to lease a car…” The Times

The Guardian and others are also guilty of using the word ‘leasing’ repeatedly when describing the PCP marketplace. To be very clear, a PCP is not a lease. It is a form of hire purchase (i.e. – a mortgage) – it says so at the top of the contract. When you take out a PCP, you are borrowing the total value of the car minus your initial deposit. When you lease a car, you do not incur a debt and simply agree to pay a monthly fee for the use of someone else’s car.

The Times gets it wrong in glorious colour

Highlighting their own confusion, The Times ran a prominent example (shown below) of a PCP payment schedule – except they actually used a PCH (personal contract hire) schedule, which is a rental…

The Times gets it wrong when trying to explain how a PCP works
Please note: despite what this picture from The Times says, it is not a description of a PCP. It’s a lease deal, with added errors for good measure.

The Times got its numbers from an independent car leasing broker who specialises in contract hire leasing, mainly for business users. Surely it would have been more sensible to call a Mercedes-Benz dealer and ask for a PCP quote? The above graphic also refers to an “implied guaranteed resale price”, which appears to be something that The Times made up on the spot. Car geeks will also note that they have used the wrong car in their illustration (the one shown would cost 15% more), but that’s the least of their crimes here…

A PCP loan includes the balloon payment/GMFV

Even when media outlets do correctly report that a PCP is a purchase rather than a rental agreement, there are mistakes being reported. One common misconception is that a customer is borrowing less money on a PCP than on a hire purchase (HP) because they are not borrowing the balloon amount, as reported in the Telegraph:

  • “(on a PCP)… ‘buyers’ borrow the difference between the price now and what it’ll be worth in four years.” – The Telegraph
  • “PCP ‘buyers’ are not actually buying their car. They are merely servicing an interest-only loan to cover the cost of its depreciation over the length of their contract.” – The Times

This is not true. Customers are borrowing the same amount on a PCP as on an HP (ie – the entire amount of the vehicle, minus any deposit), and paying interest on that entire amount. The difference is the PCP provides the option not to repay the balloon and instead hand back the car at the end of the agreement (although terms and conditions apply).

Credit checks

Another misrepresentation is that credit checks are conducted by the staff at the dealership. Again, this has been reported on multiple occasions, such as these:

  • “Salesmen are incentivised by commission and are under no obligation to perform any tests other than credit checks to test whether customers can afford car financing.” – The Telegraph
  • “(The FCA) will also check whether sales staff are carrying out sufficient checks on customers…” The Sun

The staff at the dealership are acting as agents for the finance company, and simply gather all the required personal information to send off to the finance company. It is the responsibility of the finance company to assess the application, which includes conducting a credit check from the likes of Experian. Car dealers can also only go on what customers tell them they want to spend, and do not have access to customers’ private financial information.

The only real requirement of the salesman in the dealership is to make sure that the customer’s details are being recorded correctly, and not ‘massaged’ in any way to appear more favourable to the finance company.

The FCA is investigating how financial products – principally PCPs – are sold by car dealers, but this is likely to cover how staff are explaining and selling finance products. There is certainly concern over dealers who are trying to get customers approved by second-string lenders if the customer has been declined by their primary lender (eg – if you go to a Volkswagen dealer and are declined by Volkswagen Finance, the dealer may try and get you approved by a finance company that specialises in sub-prime customers – but at much higher rates).

Hooray for the FT

Perhaps unsurprisingly, The Financial Times has done best at explaining the issues without getting into a muddle. The FT also describes the current situation as a “toxic tangle of slick salesmanship, financial wizardry, and consumer incompetence”, which sounds about right.

The FT also neatly sums up the task facing the FCA and BoE: “The car market’s heady mix of prestige products and bewildering finance will resist efforts at reform. Yet we must try.”

For more confusion, ask the readers

If you need any more convincing that there is widespread confusion about PCPs and how they work, feel free to read through the comments sections of any of the articles listed above. There are several examples of long-winded arguments between readers, berating each other over the topic. In many cases, both sides are completely wrong yet neither will admit any error and are steadfast in their (mis)beliefs. But to be fair to them, if the majority of the media can’t explain how a PCP works with armies of reporters, fact-checkers and editors, what hope does the public have?

Do you think you may have been mis-sold a PCP car finance contract? Let us know in the comments below.

6 COMMENTS

  1. Really enjoyed your article Stuart. Agree with a lot of your well made points.

    The disappointing thing about all this ‘bad press’ is that PCPs are being ‘demonised’ because its a good news story. I remember in the early nineties and used car values softened, because of the recession. Ford were widely criticised by Watchdog on tv about PCPs by customers who were handing back their cars because the value had dropped. The irony, at the time, was that all these customers were actually better off, as they had the protection of a buy back, yet PCP was widely criticised.

    This current attack seems to focus on a few key points. Firstly,the APR is so much higher than a personal loan. Not really true, but even if it was higher, so what? They are two completely different financial products, where a comparison is questionable. Secondly, consumers are stretching their monthly budgets. Again, not really true. They are acquiring a higher spec vehicle for the same budget, which is completely different. Thirdly, is affordability. I think on this, the FCA may have some argument and I can see some further development around this, which will likely be driven through finance houses. This will slow acceptance times down and increase costs, which will probably mean consumers pay higher rates ultimately- Some consumer protection!?

    My final point is that the confused.com press release/survey indicated that they didn’t understand PCPs either. They compared the lowest personal loan APR headline rates, with average used PCP rates. Furthermore, this seems like a crude promotion of their own independent finance tie up. If it ends up causing further regulator investigation and change in the industry, then that is ill thought out and not very helpful to the retail sector, where challenges are already building. What is needed is some counter PR, from the retail sector, criticising their points and promoting PCP’s. MotoNova started the ball rolling. A bit more of that would be welcome.

    Robert Newbold

    • Hi Robert. We were concentrating on major media reports, rather than the confused.com survey and other press releases that were clearly self-promotion tactics, as you suggested.

      Both the Bank of England and Financial Conduct Authority have been circling the industry for some time and they have some valid concerns (which I will be looking at later this week), but it’s too soon to start predicting what their findings will be.

      Thanks for your thoughts.

  2. Since when did “failing to read the small print” become “mis-selling”?
    This reminds of the problems with endowment mortgages – some winners and some losers

    • It’s definitely a two-way street, and customers are usually as guilty as dealers.

      If it’s an individual case, you can argue that the customer should have read the T&Cs before signing (and that’s what we normally tell readers who write about their problems). When there is a large number of people across the country who all have the same issue, it suggests that there is a problem with how the product is being sold. That’s one of the things that the FCA will be looking at as part of its investigation.

  3. Hi Stuart I am looking to buy a new car and keep it for a long time. I don’t need finance but the dealers are pushing PCP by adding big discounts. One dealer told me ‘off the record’ that I could pay it off early for a small penalty (limited by law to 1 month’s interest) and get out of the PCP deal. The PCP info on the company’s website mentions ‘subject to terms and conditions’ but doesn’t seem to have the Ts & Cs online. What do you think.?

    • Hi Jonathan. Assuming that there is nothing in the vehicle sales contract to say that the price is contingent on taking out a PCP and keeping it for a certain period of time, then yes you can absolutely cancel the finance. However, you don’t need to pay any early fees. For more information, have a read of our article about deposit contributions:

What are your thoughts? Let us know below.