Millions of motorists buy a car with a personal contract purchase agreement (PCP), spreading the sizable cost of a car over manageable monthly payments.
Sounds good, right? In principle, PCP is a great thing, but some unscrupulous car dealers have been caught manipulating interest rates, leaving some drivers paying thousands more for loans than they should.
Check if you could claim for mis-sold car finance below
My Claim GroupWe’re going to explain what PCP car finance is and why it’s now safer than ever to buy a car using a personal contract purchase. We’ll also tell you why you could be owed thousands of pounds in compensation if you’ve had a PCP agreement in the past.
What is PCP car finance?
PCP stands for personal contract purchase agreement (PCP). It’s a popular option, with nearly 2 million cars sold on PCP deals in the UK every year.
PCP is a specific type of finance plan where you pay back a proportion of the car’s amount.
You pay an initial deposit to secture the car, in most cases around 10% of the purchase price. Sometimes the car manufacturer will also add to the deposit, reducing the total price of the car.
The total amount you borrow is the vehicle’s sale price minus the deposit. This will be used to generate the monthly payment you make to the finance company.
The monthly payments are calculated by taking the car’s price (minus the deposit) and dividing it by the length of the agreement (24-48 months, in most cases). Interest rates can vary between 0-5%, depending on car value and your circumstances.
There are some key differences between PCP and a car loan.
When you get a car loan, at the end of the repayment period, you’ll own the car. At the end of a PCP agreement, you’ll need to make what’s called a balloon payment to own the car. This can be several thousand pounds.
The balloon payment won’t be a surprise. It’s all calculated at the start, with a figure called the guaranteed future value (GMFV).
So, why bother with a PCP agreement? PCP car finance enables drivers to get a new, or nearly new car, with much lower monthly repayments than a car loan. At the end of the PCP agreement, the car can be returned. If the car is worth more than the GMFV, you can use that toward the deposit for a new car.
How does PCP work?
To make it easier to understand how PCP works, we’ll provide an example. (All the figures here are illustrations and the interest rates and monthly repayments will differ, depending on a whole range of factors.)
We’ll assume you’ve found a car you want to buy and agreed on a price of £30,000 to buy it. The GMFV after 3 years is agreed to be £15,000.
You pay a £3000 deposit, leaving £27,000 to be covered by a PCP agreement.
You need to repay £12,000 (£27,000 car price minus the GMFV of £15,000), plus interest for the whole £27,000 over 3 years.
You won’t need a calculator to do all this. The details and fine print of any PCP finance agreement should all be made clear to you before you sign it.
You can choose a PCP deal provided by your car dealer or search online for another provider. It’s important to compare deals before signing up. Specifically, check out the APR and the size of the balloon payment at the end.
Before signing up for any finance agreement, always read the small print. Why? Because not all finance deals are equal.
Many car dealerships mis-sold PCP car finance in the pastCheck if you could claim for mis-sold car finance below
My Claim GroupPCP car finance mis-selling explained
In 2021, the UK banking regulator, the Financial Conduct Authority (FCA) announced it was looking into PCP deals arranged by Barclays. They soon discovered that Barclays – and a host of other highstreet banks – were involved in a massive PCP misselling scandal.
Here’s how it works. Car dealers were earning commission based on the interest rate charged to the buyer for PCP and Hire Purchase (HP) agreements. The higher the rate, the more commission they got, which incentivised them to get drivers to sign up for bad deals.Between 2007 and 2021, potentially millions of car buyers were encouraged to take out PCP deals with higher rates of interest than they should have been paying, with dealers never telling them about this.
We’re not talking about a few pounds, either. Banks have set aside billions to settle mis-selling compensation claims.
If you bought a car on PCP finance between 2007 and the end of January 2021, you could potentially claim thousands of pounds. You can make a single claim for each PCP deal. The more PCP agreements you had, the more money you could be owed.
Since 2021, PCP agreements have been sold differently, meaning you’re no longer at risk of being ripped off.
How to make a claim for mis-sold PCP
The FCA has tried to make it as simple as possible to claim for PCP mis-selling compensation. You’ll need to have details about the PCP finance provider, dates and more before making a claim.
If you don’t have the information to hand, or the time to make a claim, then visit My Claim Group. They’re one of the leading legal firms representing thousands of drivers on a no-win, no-fee basis.
It’s easy to register online and My Claim Group will find any historic PCP agreements you may have had and help you to claim any compensation that may be owed.
Click below to check if you can claim with My Claim Group.
My Claim GroupFAQs
Should I take out PCP to purchase a car?
The PCP mis-selling scandal is shocking, but it’s a thing of the past. PCP finance agreements are more tightly controlled today and you can be assured that, whatever provider you use, you’ll get the best interest rate for your circumstances.
PCP is an attractive option as it enables you to drive a new, or nearly new, car with much lower monthly payments than a loan agreement. The downside is that you’ll need to make a large balloon payment at the end of the agreement if you want to own the car.
We’re not financial advisers and can’t tell you what to do with your money. Educate yourself on different financial options for buying a car and ensure you understand the cost and implications of your choices before signing on the dotted line.
What are the alternatives to PCP?
PCP can be a great option to buy a car, but it’s not the only one. You can pay in cash or use a credit card. You can also arrange a personal loan to pay for the car, with interest rates often lower than those offered by car dealers. You can also arrange a loan through the car dealer.
Alongside cash, credit cards, loans, and PCP, you’ll find most dealers offering Hire Purchase Agreements (HP). Like PCP, you’ll need to make regular monthly payments and a final option to purchase fee (like the PCP balloon payment). The difference is that at the end of an HP agreement, you’ll own the car.
The right choice of finance depends on you, your financial circumstances, and your ability to repay any loans or finance agreements. Always ensure you know what you’re signing as a car is a significant investment!
Can you pay off a PCP agreement early?
Yes, you can pay off a PCP agreement early. Speak to your finance provider, who will give you an early settlement figure. Pay this and you’ll own the car.
Can you modify a car that has been taken out on a PCP agreement?
You can’t modify a car on a PCP agreement without the finance company’s agreement. This is because technically you’re not the legal owner of the car. If you choose to pay off the balloon payment at the end of the agreement, you’ll own the car and can do what you want with it.
Do you own the car at the end of the PCP agreement term?
No. At the end of a PCP agreement, you don’t own the car. However, you can pay the balloon payment, after which you would own the car outright.
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