The car finance market is one of the fastest growing industries in the UK. Its current value is estimated to be around £40 billion. Some 86% of new vehicles are purchased through personal contract purchase (PCP).
Now, the Financial Conduct Authority (FCA) has announced it will begin investigations into what it classifies as “irresponsible” lenders. This will include assessing who buys car finance, how cars are sold and whether or not sales staff are carrying out enough checks to make sure that borrowers can afford the repayments. Lenders found by the FCA to have mis-sold policies could find themselves in hot water – the FCA could potentially force them to pay out millions of pounds in compensation to consumers.
Impact on car finance
The effect of the FCA crackdown in the short-term could be that drivers will find it more difficult to secure car finance, as dealerships are forced into performing more thorough credit checks before allowing customers to purchase vehicles. Of more concern is the worry that the current boom in car finance could be causing a financial bubble, in much the same way that we saw a few years ago with mortgages. With the mortgage crisis, too many people found themselves on payment plans that they were subsequently unable to repay, causing a financial crash. The fact that so many drivers are now stuck on contracts with repayment arrangements that they may not fully understand (after staff encouraged them to take out plans on the spot) could mean that we will see history repeat itself.
Our advice
We recommend steering clear of the car finance market altogether. One reason for this is that car finance can add thousands of pounds to the value of the vehicle you are purchasing. There are also other factors to consider, such a depreciation – you may find that the vehicle you’ve toiled so hard to pay off is worth a fraction of your initial outlay, once the three-year payment period is over.
If you do intend to dip into the car finance market, we strongly recommend you go to more than one dealership and get quotes from each. In addition, don’t fall into the trap of buying on the spot – make sure you take the time to thoroughly read through all the paperwork associated with the purchase. Using a service like Carwow is also a sensible move. You input the details of the vehicle you want to purchase and it provides quotes from various dealerships, enabling you to find the cheapest offer. PetrolPrices.com has a fuelback offer in place with Carwow here, where you can earn £50 of fuel when you buy a car with them.
Before you do go ahead and make a purchase, we also recommend visiting a bank to find out how much a loan would cost to buy the car outright. Compare that figure against the prices you have been quoted at the dealerships before you commit to taking out a contract. You will often find that a bank’s repayment plan will be far more cost-effective than that of a dealership. In addition, the bank will thoroughly vet you as an applicant, to make sure that you can afford the repayments before it gives you the loan. It is also worth remembering that by financing a new vehicle in this way, you will actually own the car and won’t be penalised for any dents or scratches it may pick up.
Is your vehicle on a PCP plan? If so, we would love to hear about your experience in the comments section below. If you haven’t taken out a PCP plan, would you be more wary of purchasing a vehicle through one now, given the FCA’s concerns? Let us know in the comments.
Image credit – Pixabay
I am purchasing my car via pcp. There were two schemes available, Just Add Fuel and Passport. I opted for Just Add Fuel to save on service payments every year. The cost of servicing was built in so no lump sum to find every year. As I had no proof of my No Claims Discount from my previous insurer I was re-quoted for the Passport scheme. After obtaining my proof of no claims I gave this to the salesman. Then on the day I went in to sign and receive my shiny new purchase I found that the salesman had forgotten to change my purchase plan. He assured me that this was the better option and everyone was taking it.
I later noticed that the final repayment from the original quote has gone up from £5700 to £7000 when the final paperwork came through.
In future I will buy second hand using a personal loan.
3 years ago I leased a new E Class Mercedes paying just under £400 / Month + A maintenance schedule at £30 / Month
I exchanged that vehicle on the 31st March for another New (2017) E Class. I now pay just over )£500 per month.
I effectively “bought” a brand new Mercedes at half price, as I handed it back at the end of the contracted period and moved on to the new car which will be handed in at the end of that contract period. By then, I will have done exactly the same as before and paid half price for
a brand new car. Is it any wonder that this method of acquiring a new car is achieving such a high popularity?
Jonathan – you’re getting your car on a personal contract purchase (PCP) while I suspect that Edward in the message above is using either a business or personal lease (contract hire)
I have used both business and more recently personal contact hire for the last 25 years or so. I have a brand new car every 3 years and pay a fraction of the costs associated with pcp – ie the larger deposit up front followed by higher monthly charges and then having to pay the balance if you actually want to keep the 3 year old car at the end.
With contract hire you simply hand the car back at the end and start again with another new car. The only other option is that a relative or friend can offer to buy the car from the finance company for a negotiated sum which saves them the trouble of disposing of it, usually at auction.
I have done the homework and every time contract hire works out far better value than a PCP.
Motor dealers love PCP’s because they are far more profitable for them and they will always try to steer you that way.
3 years ago I actually had a main dealer telling me that as I no longer had a business I wasn’t eligible for contract hire.
He even said it was illegal! I told him to do some homework because he was talking nonsense. With that I walked straight out of there.
Anyway, hope this helps anyone looking to obtain a new vehicle.
I am purchasing my car via pcp. There were two schemes available, Just Add Fuel and Passport. I opted for Just Add Fuel to save on service payments every year. The cost of servicing was built in so no lump sum to find every year. As I had no proof of my No Claims Discount from my previous insurer I was re-quoted for the Passport scheme. After obtaining my proof of no claims I gave this to the salesman. Then on the day I went in to sign and receive my shiny new purchase I found that the salesman had forgotten to change my purchase plan. He assured me that this was the better option and everyone was taking it.
I later noticed that the final repayment from the original quote has gone up from £5700 to £7000 when the final paperwork came through.
In future I will buy second hand using a personal loan.
3 years ago I leased a new E Class Mercedes paying just under £400 / Month + A maintenance schedule at £30 / Month
I exchanged that vehicle on the 31st March for another New (2017) E Class. I now pay just over )£500 per month.
I effectively “bought” a brand new Mercedes at half price, as I handed it back at the end of the contracted period and moved on to the new car which will be handed in at the end of that contract period. By then, I will have done exactly the same as before and paid half price for
a brand new car. Is it any wonder that this method of acquiring a new car is achieving such a high popularity?
Jonathan – you’re getting your car on a personal contract purchase (PCP) while I suspect that Edward in the message above is using either a business or personal lease (contract hire)
I have used both business and more recently personal contact hire for the last 25 years or so. I have a brand new car every 3 years and pay a fraction of the costs associated with pcp – ie the larger deposit up front followed by higher monthly charges and then having to pay the balance if you actually want to keep the 3 year old car at the end.
With contract hire you simply hand the car back at the end and start again with another new car. The only other option is that a relative or friend can offer to buy the car from the finance company for a negotiated sum which saves them the trouble of disposing of it, usually at auction.
I have done the homework and every time contract hire works out far better value than a PCP.
Motor dealers love PCP’s because they are far more profitable for them and they will always try to steer you that way.
3 years ago I actually had a main dealer telling me that as I no longer had a business I wasn’t eligible for contract hire.
He even said it was illegal! I told him to do some homework because he was talking nonsense. With that I walked straight out of there.
Anyway, hope this helps anyone looking to obtain a new vehicle.