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.