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Car finance: Top 10 PCP myths busted

Millions of UK car buyers fundamentally misunderstand how PCP car finance works. Here we shatter ten of the biggest myths.

PCP Myth #3: You’re only financing the depreciation

This is another classic dealer misrepresentation, with buyers often being told that they are not borrowing the full value of the car (and the mainstream media has also struggled to understand this).

When you take out a PCP loan, you are borrowing the whole value of the car, minus any deposit. However, you don’t repay the balloon/GFV amount until the very end, so you have 36 or 48 smaller payments followed by one very large payment.

Regardless of whether you plan to make that final payment to keep the car, or give it back to the finance company, or part-exchange it, you are still borrowing that large balloon amount and you are still paying interest on it. Crucially, it also means that if you run into financial trouble, your actual debt to the finance company is probably much larger than you realise.

Renault dealer in Edinburgh offering PCP car finance

PCP Myth #4: Mileage doesn’t matter

Plenty of people on our forums in the last few years have reported that dealers have told them that their annual mileage doesn’t matter, so they may as well declare a very low annual mileage to keep their payments down. This is very poor information from salespeople, and very misleading. In fact, it’s blatantly lying and mis-selling – if you can prove it (funnily enough, they never put it in writing).

If you pay off the balloon value and keep the car, then the mileage doesn’t matter. You can do what you like because you’re paying off the whole loan and taking ownership of the vehicle. However, if you plan to give the car back to the finance company or part-exchange it for another vehicle (which happens for more than eight out of every ten PCP agreements), you will find out very quickly that the mileage does matter.

   

PCP agreements have an excess mileage charge, usually about 10 pence per mile (or £100 per 1,000 miles, if that’s easier). This only applies if you plan to give the car back to the finance company at the end of the agreement – the finance company will send you an invoice after you hand the car back.

However, if you are part-exchanging the car at a dealership, it is also a problem. If your annual mileage allowance is set too low, the value of your car will be much lower when you want to part-exchange it and it will probably be worth less than the balloon/GFV amount.

That means that not only will you not have any equity to put towards your next car, but you will have negative equity to clear from your savings just to get rid of your current car. You can either pay the negative equity to the dealership or give the car back to the finance company and pay the excess mileage charges, whichever is less expensive, but you will be much worse off than if your mileage was set correctly for your requirements in the first place.

For more information, check this out:
What are your options at the end of your PCP?

PCP Myth #5: You can hand back the car at any time

As you’ve probably guessed by now, this one isn’t true either. Some people seem to think that if your circumstances change or you can no longer afford your payments, you can simply hand the car back to the dealer or finance company and walk away at any time.

There is a clause in all PCP agreements called Voluntary Termination, which allows you to give the car back and terminate your contract as long as you have paid 50% of the total amount you owe (called the Total Amount Payable). This does not mean 50% of the term, so after two years of a four-year PCP you will still be a long way short of repaying 50% because you haven’t made any dent in the balloon payment.

Usually, you will only hit the 50% repayment point in the last few months of a PCP – although the exact point will vary depending on a number of factors. You can voluntarily terminate the agreement before you reach this 50% point, but you will have to pay whatever is remaining to hit the 50% mark.

If you really get into bad financial shape, the last-resort, last-ditch option is called voluntary surrender. Although the name sounds similar, this is a very different proposition from voluntary termination and something you don’t ever want to have to do.

Basically, you hand back the car because you can’t make your payments, the finance company sells it at auction to help pay off some of your debt and then comes after you for whatever’s left (usually several thousand pounds). Obviously, you don’t have several thousand pounds, which is why you had to give up the car in the first place.

Inevitably it leads to collections agencies and legal action, and it can take years to dig yourself out of the financial hole you will end up in if you have to go down the voluntary surrender path.

For more information, check this out:
Voluntary termination of a PCP or HP

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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive 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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4 COMMENTS

  1. Im thinking of doing PCP on a car worth 36000, with the deposit at 8000 and 36 monthly repayments of 450. When that ends after 3 years and I decide to trade it in for a new one, Will I have to put 8k down as a deposit again to keep my payments at 450 a month?
    Thanks

    • Hi Rob. Assuming you don’t have any equity in the agreement, the same car price/spec/mileage/residual value and the same finance APR and term, then yes.

      In reality, your next car won’t be exactly the same and the finance agreement won’t be exactly the same. But in principle, yes.

      For more information, have a read of our guide to PCP car finance.

  2. Hi Stuart, thanks for the reply. I have heard they give you the absolute minimum of what they think the GMFV will be so chances are you will have equity to put towards the car for your next pcp deal , correct?

    • That certainly used to be the case, but not so much anymore. GFVs have been creeping up (being artificially propped up by manufacturer finance companies to help keep monthly payments down), while used car values have been coming down. The combined result of these two factors is that most customers are now finding they have little to no equity at the end of their PCP agreements, whereas previously they had a useful amount to put towards their next car. We explored this a few months ago in this article about falling new car sales.

What are your thoughts? Let us know below.

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