Why PCP could be the next PPI claims scandal
The most popular form of car finance, personal contact purchase (PCP), could emerge as the next PPI scandal, following a deep investigation by the Financial Conduct Authority (FCA) into how cars are financed through car dealerships.
Although PCP is used by 90% of UK motorists, the regulator has highlighted issues over unaffordable balloon payments and the role of car dealers over-selling finance at a higher rate to earn large commissions.
PCP is popular because it gives car buyers the chance to pay lower monthly payments with a large balloon payment at the end of the 3 or 4-year deal if they want to eventually own the car. For many, it makes the process of buying a car more affordable and realistic.
However, the long-term result is that many customers are finding themselves in negative equity and needing to pay an inflated balloon payment – and realistically are further away from owning the car outright, although they have made years of payment.
An investigation by the FCA shows that the average motorist may have been charged in the region of £1,000 to £1,100 extra for their car finance. Financial experts are predicting that potential claims could mirror the PPI scandal that refunded over £50 billion from UK banks over the last few years in the UK.
Later this year, claimants may be able to apply for compensation for PCP in a similar way to PPI. Although this is yet to be confirmed and many claimants are awaiting more information from the FCA.
Reflecting on the PCP scandal, we spoke to someone from Quick Car Finance who specialise in brokering hire purchase and car finance.
“Until now, customers may have been overcharged by their car dealer who could freely charge more to earn more commission. The customer would never know if they were truly getting a good deal or not.”
“The next issue is that your balloon payment could be greatly inflated. After all, doing more mileage or having any scratches or dents will make the outright purchase of your car more expensive and this is stated in the terms of your agreement.”
“At Quick Car Finance, we prefer to offer hire purchase which means that every month you are paying and investing into your car which you will eventually own. With PCP, you are relying on a balloon payment in order to own your vehicle, but when it comes to the end of the agreement, this could be greatly overpriced or poor value for money.”
The FCA is still investigating the car finance industry and more information about claiming compensation will be confirmed later this year.