How to Spot and Avoid Mis-Sold PCP Finance Deals

Introduction

Personal Contract Purchase (PCP) agreements are amongst the UK’s most popular car finance options, brought about by several reasons. Their flexibility and lower monthly payments appeal to many buyers, as does the option to either switch cars regularly or own the vehicle outright at the end of the term. However, with this rising popularity has come an increase in cases of mis-sold PCP finance, making it crucial for consumers to fully understand these agreements before committing.

What is a PCP Finance?

A PCP Finance Agreement is a loan that allows you to drive your preferred car without paying the full price upfront, offering multiple end-of-term options. You can either return the vehicle, trade it in or buy it outright at a lump sum 'balloon payment'.

Unlike HP or Hire Purchase, where you pay for the entire car value in instalments, this finance agreement considers the car's depreciation value, which explains the lower monthly payments. Your payments cover the car's depreciation—the difference between its value at the start and the end of the agreement.

In the comparison of PCP agreements with other finance options like personal loans where you own the car from the outset, with PCP finance, you don't own the vehicle but pay to use it for a certain agreed contract length.

PCP finance is advantageous for people interested in switching cars and driving new models now and then. Yet there are also considerations such as mileage, age, and higher 'optional final payment' or the balloon payment, which needs to be fully disclosed to avoid another PCP claim.

Understanding PCP car finance

How is PCP car finance calculated?

The car's projected value at the end of the agreement, or the Residual Value (RV) or Guaranteed Minimum Future Value (GMFV), is estimated by the company and will depend on the age of the vehicle and predicted annual mileage.

What is a Balloon Payment?

Balloon Payment is a fixed cost calculated and agreed upon at the beginning of your term. It is the GMFV or the optional payment you settle should you decide to buy the car after your deal ends. This lump sum value will depend on the company; regardless of your car's fluctuation value, this amount will not increase or change. Sometimes, a lender underestimates the car's fluctuation value and prices less than the car's current worth.

What are the Mileage Caps?

Every PCP finance agreement includes a mileage cap, which is the maximum distance you can drive annually as agreed with your lender. This cap helps determine your monthly payments. Often, the causes of PCP finance claims are agents luring customers to unrealistic mileage caps. The tip here is to conduct an ideal and realistic estimate of your annual mileage to avoid paying the excess mileage charges.

Typically, lenders charge about 4p-72p per mileage excess. But you can get around to this, as the mileage will only be assessed at the end of the term. So, say you went over the cap in your first year, don’t worry as you can reduce your limit next year so your average annual cap still meets your agreed mileage.

What is the equity?

You'll have to consider equity if you're trading in your vehicle or buying it. To know this value, you can subtract the balance you owe from the current value of the vehicle, which you can check with free car valuation tools online - ensure you get all the data correct. You'll always want positive equity.

Positive equity is when your trade-in value is more significant compared to how much you still owe the lender. For example, suppose your trade-in value is £ 15,000, and your remaining balance is £ 5,000 for financing your old car. In that case, you have a £10,000 positive equity, which can be deducted when you avail of the new vehicle. Should you choose to sell, then this means you can still profit from the car.

Meanwhile, if, based on your calculation, you have negative equity, then it is better to return the car and pass the weight of its negative equity to the lender.

How does PCP finance work?

Depending on the lender and the client's discretion, a PCP finance agreement can run from three (3) to five (5) years. The agreement begins with a deposit, usually around 10% of the car's price, which is deducted from the total amount owed before monthly payments are calculated. The lender will divide the cost over the deal term, to come up with the monthly payment cost, and then add APR (Annual Percentage Rate), which can go from 5.5% to 14.9%, as it is influenced by the UK's economy and financial market.

What are the end-of-term options for PCP finance?

PCP financing is unique because it has three end-of-term options – return, trade-in, or buy outright.

1. Returning the Vehicle

Most people with PCP choose to return their vehicle to the lender, as this is the easiest and cheapest end-of-term option. You pay the value for leasing the car and just walk away after. This also happens a lot when the owner has already ran a high mileage. But even if this is the most convenient option, you should also pay attention to instances that will require you to pay penalty charges upon return, such as when:

• You exceed the mileage allowance. 
• There is excessive wear and damage that’s not acceptable under the agreed conditions.
• You lost the necessary documentation, such as the V5C logbook and the car key.

2. Trade-In

Trading in the vehicle is an option if you want to simply replace your current car with another one – preferably a newer model. This can happen either in between your deal term or after. Whether you trade in with the same dealer or choose another, the decision is yours. But regardless of which, your dealer will certainly ask for a convenience fee.

3. Buying the vehicle after the term

If you get too attached to the car, you may buy it; however, remember that it will be hefty, especially with the balloon payment or lump-sum amount you must pay. The balloon payment will be even higher if you pay lower monthly payments and deposits. It’s better to reassess completely whether purchasing the car after a PCP finance agreement is the best option for you, given the costs. 

Owners of limited-edition cars or vehicles kept in excellent condition, with repairs and customisations, often choose to buy the car at the end of a PCP agreement. This is because they are likely to gain more value from retaining the vehicle than purchasing a new one. 

How to spot mis-sold car finance

Given the benefits and advantages of PCP financing, no doubt many people choose this car financing option. However, it’s essential to carefully review and assess the whole agreement before signing up, or it may do you more harm than good, especially with the rising concerns on PCP claims and mis-sold car finance. Here’s a brief overview of the red flags to spot on:

1. Hidden Fees

Unfortunately, some dealers are not transparent in discussing the other fees within the agreement, especially if they notice how much you’re interested or when they think they need to do a little more selling. There’s nothing wrong with being proactive and looking out for charges like administration fees, early repayment, excess mileage penalties, and excessive wear and tear costs. 

It's better to review these right away so you know exactly what you’re getting into, as often people choose this because it’s a cost-effective option, and these hidden fees may end up charging you more than you can save. 

2. Unsuitable Agreements

In a PCP finance agreement, your mileage limit will play a huge role, so unless you want to pay more, it’s better to set realistic mileage according to your driving habits. Again, PCP agreements are customisable, but it won’t matter if they don’t match your current needs.   

You should also be wary of dealers who push shorter contract terms, as this will likely make the deal less affordable, making the monthly payments heftier than you can afford. 

3. Misrepresentation of Key Terms

PCP financing is full of jargon, and it’s a must to understand the critical terms such as balloon payment, residual value, and acronyms like GMFV. If your dealer or agent refuses to explain thoroughly or cannot fully make you understand, it can indicate a lack of transparency, which is a red flag, especially in finance fields and industries like this.

Signs of mis-sold PCP finance

The increasing number of PCP claims all over the UK reminds consumers, future buyers, and lessees to be more mindful of the PCP finance agreements they sign themselves up for. Mis-sold car finance is more common than ever, and being led into a deal that’s not suitable for you can be frustrating. Here are telltale signs of a mis-sold PCP finance. 

• Lack of full disclosure. Before signing a contract, you should know key terms such as balloon payment, fees and penalties, and mileage limits. If not, then the agreement may have been mis-sold. 
• Being pressured to sign right away. Great dealers and lenders won’t rush their clients into signing up for something that they aren’t sure of. If you’re being harassed into signing up quickly or thrown phrases like “This is a limited deal” or “This deal is only for you, " it’s best to find another lender instead. 
• Misleading promises. Some dealers make unrealistic claims such as guaranteed approval despite bad credit history, lower balloon payments, and a promise of positive equity. Always check the written agreement and ensure that whatever they promise or claim is in writing. 
• Failure to explain commission. Discretionary commissions in PCP agreements have been a broad topic in the automotive segment. As a customer, you should ask questions like the interest rate and how it was computed to be able to make fully-informed decisions on pursuing. Your lenders should always be transparent in answering these questions.

If you think you’ve been mis-sold car finance, then check the eligibility criteria for PCP agreements right away to know and assess if you qualify for a valid PCP claim. Always take time to review the terms and every section of your contract is a preventative approach to a lengthy PCP claim process. 

Conclusion

PCP agreements are a flexible way to finance a vehicle, but they do not come without cons, either. Understanding the details of the entire agreement is crucial to avoid falling into potential pitfalls. Review the agreement, ensure you know the key terms involved, and be cautious of hidden charges and possible misinterpretations. 

If you suspect you’ve been a victim of mis-sold PCP finance, do not hesitate to take action and seek advice from the experts in the field. Conducting a PCP Claim check can help identify whether you’re eligible for adjustments or compensation.