The RAC has launched a new personal loan offer aimed at winning used car buyers away from the ever-increasing popularity of personal contract purchase (PCP) car finance.
Called Flexiloan, the payment structure of the loan mimics that of a PCP agreement, with low monthly payments followed by a large balloon. The RAC hopes that the product will appeal to car buyers who like the low monthly payments of a PCP but want greater control and flexibility over managing their finances.
The Flexiloan product is aimed at used car buyers rather than new cars buyers, with customers having to choose a car that is at least two years old (and no more than four years old). This is different from a normal personal loan application, where you can essentially spend the money however you like. The RAC says that this is to make sure that borrowers are choosing a balloon value that is appropriate for the expected value of the car at that time. It also hopes that Flexiloan will be extended to cars only a year old later this year. Mind you, given that the customer can sell their car at any time or even buy a different car once the money is in their bank account, this seems a bit pointless.
Like any personal loan, the funds are provided to the borrower directly, and you then pay the seller yourself. The car can be bought from a dealer or a private seller.
Borrowers can choose to manipulate the monthly payments and final balloon amount to achieve a balance that they are happy with. Unlike a PCP, there is no option to give the car back to the finance company at the end of the agreement, so you have to pay off the balloon one way or another. However, there is more flexibility to do that with the Flexiloan than there is with a PCP, and you can re-finance the balloon with the RAC if you don’t have the cash to pay it off (although this will presumably be at a higher interest rate).
Being a personal loan, the Flexiloan is a form of unsecured finance. That means that the finance company lends you the money and you use it to buy a car. The car is yours from day one, unlike a PCP or hire purchase (HP), which are secured loans and therefore the car does not truly belong to you until the last penny has been paid off. However, it also means that Flexiloan does not come with voluntary termination rights, so you can’t give the car back once you have paid 50% of the total amount payable like you can with a PCP or HP.
If your circumstances change and you need/want to sell the car, you are free to do so. You still have to pay back the finance company what you owe (which you can do with the money you got by selling the car), but the loan is separate from the ownership of the car. With a PCP, it’s not your car to sell so it is much more difficult to manage the situation if you need to get rid of the car before the end of the agreement.
The other major difference between a personal loan product and a PCP is that there are no requirements regarding annual mileage, servicing or vehicle condition – once again, it’s your car so you can do as many miles as you like, service it wherever you want, and not worry about dents and scratches.
Can Flexiloan tempt borrowers away from PCPs and other personal loans?
Based on what has been offered so far, and from the RAC’s explanation, Flexiloan looks like a fairly niche product at this stage. There are several restrictions and limitations that will exclude most buyers, and the impression is that the RAC is using Flexiloan to generate attention for its overall finance programme.
One of the keys to the RAC’s likely success or failure with Flexiloan is likely to be how competitive they can be on their interest rates. The advertised example on the RAC website is 12.9% APR, which is very high compared to other personal loan providers. The quote calculator uses an 8.9% APR to come up with its predicted numbers, which it claims is the representative rate (which means that at least half of customers can expect to be offered that rate).
Meanwhile, the RAC’s eternal rivals over at the AA are offering personal loans from only 3.1% APR for AA members. That means you will be paying hundreds, or even thousands, of pounds more in interest on a Flexiloan and not saving that much on your monthly payments (plus you have to pay off the balloon at the end). A representative from the RAC rather sniffily criticised lenders offering low interest rates, claiming that those lenders reject a very high number of applicants in order to preserve the advertised rates.
The RAC is clearly targeting dealer-provided finance, however, and used car PCPs tend to have interest rates that are comparable to those advertised examples for Flexiloan. Used car PCPs are usually offered at more than 10% APR, although you are normally able to negotiate the rate by a percentage point or two.
Key points to note about the RAC Flexiloan
- Flexiloan is a form of personal loan.
- A personal loan is a form of unsecured finance, and is not connected to the car. You can sell the car at any time, but you still need to pay back the finance company what you owe.
- A personal loan does not include clauses for voluntary termination or repossession, as the finance company does not own the car at any point.
- The interest rate is fixed for the entire duration of the product. However, if you choose to re-finance the final balloon payment rather than paying it off from your savings, you will almost certainly not be offered the same rate for the re-financing.
- You have to use the loan money to buy a car that is between two and four years old