A recent survey says over a quarter of UK drivers feel trapped within their car finance agreements because they can’t afford the final balloon payment at the end of the term, resulting in them entering yet another—often more expensive contract.
Car subscription company Drover, surveyed 1,500 drivers and discovered that 65% of those who considered themselves entangled by their car finance agreements took out another Personal Contract Purchase (PCP) because they didn’t want to face losing the investment they’d made into the car.
Bad deals and confusion
With around 23% of UK motorists (8.7 million) signed up to a car finance agreement, the Drover survey shows 28% of people report being ‘trapped’ and full of regret about the contract they entered.
Of those people, 60% say they can’t afford to end the agreement early and just over a third of these drivers are in their third finance arrangement, with 54% saying the interest rate increases with each new contract. What’s shocking, is that 43% of the survey respondents couldn’t say what their current interest rate was.
Sixty-one per cent of the motorists who considered themselves trapped said they’d taken out a bad deal. Thirty-four per cent reported being confused by the various deals on offer. So, are dealers offering transparent information to would-be customers? That’s something the Financial Conduct Authority is looking into, and whether products are being mis-sold and if dealers are practising responsible lending based on the individual’s ability to repay their loan.
If this survey is a correct representation of most UK drivers this amounts to a huge number of people unhappy or confused about their contracts, so why did they sign up for PCP in the first place? Forty-three per cent said it was to end the stress of car-buying, with almost half of the 1,500 survey respondents admitting to not shopping around before signing their contracts.
‘Netflix’ for cars?
With the many strands of commitments required for the privilege of driving a vehicle, such as insurance, road tax, breakdown cover, servicing and maintenance, could it be time for motorists to look at an alternative option?
Subscription services are more popular than ever, to enjoy anything from television to food, to clothing. Is it any wonder that companies such as Wagonex and Drover have applied this model to car usage, too? A global 2017 study showed that 74% of car executives believe more than half of car owners today wouldn’t want to own cars in the future.
Customers of car subscription services pay a monthly amount that covers everything except fuel, and with no penalty fee if they cancel.
Founder and CEO of Drover, Felix Leuschner, said: “Buying a car is [a] daunting prospect for many drivers – not only is there so much choice, but car finance deals are hugely confusing. We are aiming to help drivers by providing a more flexible way to run a car without the commitment of car finance.”
Reduce your PCP costs
A Personal Contract Purchase is a loan to get a car. Unlike a personal loan, you don’t pay off the full value of the car and you don’t own it at the end of the deal unless you choose that route. The deposit is around 10% of the car’s price but certain car manufacturers’ finance arms offer ‘deposit contributions’ of £500-£2,000 or more if you’re buying a new car—if you take out their finance. The larger the deposit you pay, the less you need to borrow as a loan.
There are dealers who offer 0% but you should be wary of this, as costs often hide elsewhere, such as in an inflated balloon payment or a higher ticket price than you would’ve paid had you bought the car outright.
Only 20% of people with a PCP deal buy the car at the end of the term. If you don’t plan to buy the car, see if leasing is a better choice. You don’t own the car when you lease, but you pay less each month.
By lowering your annual mileage, you’ll lower your repayments, but don’t enter a low mileage amount on your agreement if you have concerns you’ll exceed it, or you may face expensive over-mileage charges. Understand, too, that the dealer will charge you for any damage to the car, such as scratches or dents, which you must pay for when you return the car.
The Automobile Association calculates that, on average, new cars lose 60% of their value within three years and because with a PCP you finance what the car depreciates, it’s wise to choose a car that’s more likely to keep its value. The best way to lower PCP repayments, though, is to opt for a cheaper car.
Have you ever signed a Personal Contract Purchase? Are you feeling trapped within your contract? What’s your opinion on car subscription services? Do you think they’re the future or will they cost drivers more money? Tell us in the comments.
The point of perpetual finance deals as far as the lender is concerned is to keep the ball rolling on finance, this maximises the profit made by lenders & is gladly assisted by dealers who want to sell a new car every 3 or 5 years (depending on the deal term) to a captive audience.
25 years ago I bought my first car with what I could afford (roughly £600.00 for a 10 yr old Fiesta) & back then the build quality and reliability of a 10yr car was far worse than a 2008 model now so there is no need to change the car so often.
Buy what you can afford and ditch the finance.
I Buy 1 year old cars for about 50% of list price, do about 200,000 in them over the next 5 years and then (because of our company policy for cars, I have to get a new one. I pass the old one on to a friend or relative as it is low value and I have made a profit out of my car allowances. I would never buy new as I depreciate to next to zero in 5 years
I have never owned a new car and reading this makes me very unlikely to ever consider it.
Obviously people look in the short term just to have a new car and forget about the last payment to actually own the car.
Honestly I would never like to lose 30% in 3 years. That’s why I have always bought cars after the major depreciation is over.
i bought a new honda jazz three years ago and paid an extra £2000 on top of the deposit then after 36 months i had a letter saying either part exchange for another new car or give the car back or pay the balance of £4700 i was totally surprised as i am 79 years old and upset me quite a lot so i cancelled my planned cruise and drew out my savings to pay it off that’s what i got after working until i was 69 i also took out a five year service plan and last month after travelling 25 miles each way to get it serviced by the dealer when i got home they hadnt stamped my service record i had to post it to them didn’t even get a sorry i had always bought toyota before five of them that has been my experience
gwyn jones
My advice with all of this is to pay cash up front and not take out loans, if you can’t afford it, don’t buy it. We just bought a 6 year old car for £2,500 cash. And it’s perfectly OK.
There is no fool like an old fool- how is this anyone’s responsibility apart from yours?
alot of Salespeople at the dealerships hide the fact the are selling you a PCP (Personal Contract Purchase) by calling it Finance especially so if its at 0%…
but then again alot of buyers are not asking enough questions, reading and checking what they are signing for…
so just BEWARE!!!
PCP is the next PPI miselling scandal. Thought it for a while. Your article serves to highlight this very eloquently indeed. Watch this space.
Not sure it is mis selling like PPI. Just people aren’t taking enough responsibility to read what they are signing up to.
Why not just get a bank loan. That way you will know whether you can afford it or not and you will know what you are paying for it. ie the interest rate!
Because a bank loan will include the balloon payment and many cannot afford that so they PCP instead.
I apologise if this is considered to be advertising,it is merely a recommendation.
Perhaps approach a claims management company on a “no win no fee” basis.
Such as Hydrogard Legal Services 08000 74 84 94.
A new car is never an investment and will always suffer from depreciation. Even most used cars will depreciate in value and those that don’t will cost a lot in maintenance instead – it’s part of the cost of motoring.
Loans and finance often are ways for companies to take advantage of people’s greed – people buying things they can’t afford now. PCP deals are just the latest versions of it – people like to show off in cars that are less than 3 years old and are happy to pay out hundreds a month, often at the expense of saving, to create the illusion of their success. Then when the hard times hit (or they find they can’t retire) it’s someone else’s fault. More fool human nature.
I recently bought a new top of the range Toyota C-Hr Hybrid from a Toyota Dealership to get away from Diesel and was lucky enough to be able to release the cash to pay for it outright. It has a 5 year warranty and I also bought a 3 year service plan with the dealer. Previously, I had bought a Nissan Qashqai Diesel with part finance which I settled quickly. I bought it from an online dealer and saved £6343 on a Dealer listed price of £29460. It was a good reliable car and I kept it for the length of it’s warranty period, 3 years. Unfortunately, I couldn’t find the same type of savings for the C-Hr from the online dealer, and as I was part exchanging the Qashqai, my only option was to go with the Toyota dealer for a P/X. The Toyota is lovely and returns good mileage, but I realise that I will take a hit if I don’t keep it for at least 5 years, by which time I will be well into my 70’s. Providing a car is reliable, the only way to try and mitigate financial loss is to keep them for a lengthy period. After all, what return can you get from investments these days! Finance is always going to be costly, as is PCP. Perhaps leasing may be the way if you can’t afford to pay cash.
A few months ago I went into my local Ford dealership to finalize purchase of my new car. I could not help overhearing the conversation the dealer was having with a young couple who were looking to part exchange their existing car. The dealer spent a good half hour trying to explain to them the situation they had gotten into with their existing finance deal, explaining to them how it worked and why it was a very bad idea because of the various costs involved why he did NOT want to sell them a vehicle at the present time. He got five gold stars in my book for that.
It is now being predicted the PCP’s are soon to become the next ‘2008 sub-prime’ economic folly and financial disaster. I have always worked on the principle of if it’s being pushed by the motor trade as being to my benefit it can only be a good deal for them and not for me. After all, car dealer are mere horse traders and their dubious reputation has gone before then for centuries, if not millennia. What ever happened to the simple axiom, ‘caviat emptor’?
The paradox is that the main attraction of a PCP is that one can trade up to flaunt a car which one can rarely justify and invariably not afford, the perception being that will enhance one’s social standing. It called ‘Hidden Persuasion’ – read the late Vance Packard’s book on that very topic, written in the 1950’s and as as relevant now as it was then. Indeed more so, because the ‘hidden persuasion’ has become ever more subtle and skillful.
I can’t help but wonder if this is in the main down to people wanting a car that they just cannot afford. You don’t have to have a new car every 3 years. I drove an old banger until I could afford something better.
I bought a 6-year old Rover 820 14 years ago for £2000. It costs just running expenses and the occasional repair. Lovely car and depreciation can be considered non-existent. Buy what you can afford!
PCP……… A excuse to inflate the price of the car to a gullible public by unscrupulous manufactures and dealers.
If you had to buy it outright on a three year finance deal with a deposit,the price would come down to an affordable level.
I have a PCP and my interest is very low so I can afford it ok the only thing I got caught on was handing the car back early. I read my contract and it said once I had paid 50% back I could return the car. After 2 yrs Into a 4yr contract i thought must have paid 50% off but what I did not a take into account was the balloon payment. So it is 3 yrs before I can do that… in the meantime they have tried to get me to part exchange. 😂
fools and their money are easily parted an old but true saying
As a former professional buyer I always read all the small print, boring as it is, but it warns you in advance of such situations. Most people can’t be a***d and thus find themselves in this mess. It’s not condescending to always read the small print and if you don’t understand it, then find someone like myself as a friend, or the citizens advice bureau to translate, prior to signing on the dotted line. Sales people may pressurize you, but you do not have to take it. That wonderful deal is well just too wonderful. Free lunch metaphors kick in here.
Problem here is too many people want to be seen in the newest available car with all the “trimmings” included,just to showoff.Whether or not the monthly payments constitute whatever high percentage of their income does not matter one jot.The thing topmost in their minds is being seen in the latest model of whatever flash car they’re driving.
I drive an ‘ancient’ car first reg’d in 1998, daily and has never let me down.Starts first time everytime winter or summer and best of all,outperforms many more modern cars on the road today.
No pcp,loan or any other debt against it.I dont need to be seen or try to impress with the latest car model,which I dont even own.
Pure greed,arrogance and ego i.m.o.
If you are stupid enough to sign up to such agreements and now regret it,tough s**+,should have bought something you could afford to buy outright or think about what you were signing up for in the first place.
I spent the last 15 years traveling 70 miles each way to work and back and easily clocked up 25-30k miles a year. For me PCP plans were a god send. I was buying cars every 2 years. By buying a low mileage car at 2 years old I was able to average out the mileage enough to be able to part ex it each time. Because of the mileage I was doing a £500 car wouldn’t have lasted a year. And they didn’t I tried. I have recently been moved by my employer and I have exchanged my car for a Train. I just surrendered the car and had nothing to pay. I just use the wifes car these days. I can see though how pcp plans can trap people in. And its not something I will be having in future. I only need a car for shopping in we will just run our current one into the ground.
You don’t have to be a genius to realise that PCP is a folly for the private motorist to get sucked in to buying a new car …. Your first deal starts off a maybe being a bit of a bargain, although I’d say HP is cheaper, then when it experies they’ve got their greedy claws hooked into you the cost of the next deal rises and keeps rising with each subsequent deal…
That’s not including the extortionate prices to repair minescule damage to cars .. I’ve heard horror stories of people being charged for a new alloy that a can be refurbished for £40 or a respray for scratches that a decent detailer can machine polish out for a few hundred pounds