It gets better. Depending on the model, the deposit required from the customer can range from nothing to just a few thousand pounds, made possible by the generous deposit contribution (an under-the-table discount by any other name) that most car makers are happy to give. However, the customer doesn’t own the car until they’ve paid the deferred amount, commonly known as the minimum guaranteed future value (MGFV).
At the end of the agreement, they have three options: they can pay the MGFV and own the car, or return the keys and, subject to any excess mileage penalties or charges relating to the condition of the car, hand it back with nothing more to pay, or part-exchange the car for a new one.
In the past six years, annual new car sales have increased by 39% – from 1.94 million in 2011 to 2.74m in 2016. Last year, 86% of cars were bought on finance, of which 82% were funded by PCPs. Coming so soon after the debt-fuelled recession of 2008, you’d think such credit would be harder to come by. If Emmalyne’s experience is typical, it’s astonishingly easy.
“Given I’d been out of the country for one year, had no job, was living with my grandma and only had a few savings, I thought the dealer would turn me down,” she says. “Instead, the finance company ran a credit check and I was accepted. No one asked me what my income was. The salesman knocked £1500 off the price, I paid a £1000 deposit – which just about cleaned me out – and agreed an annual mileage, and drove off in a new Polo.”
Bank of England looks to regulate PCP car finance deals
The apparent ease with which Emmalyne got behind the wheel of a Polo with an invoice price, after the dealer’s discount, of £14,114 might surprise some people. However, it comes as no surprise to Claire King, insight manager at the Money Advice Trust, an organisation that helps people tackle their debts.
“Credit checks use historical data and are not a reliable indicator of your ability to pay off your loan,” she says. “We’ve seen a 1.1% rise in the number of people seeking help with their PCP debts – from 10.5% last year to 11.6% in the first quarter of this year.”
King says a change in circumstances – an accident, a death in the family, the loss of a job – is often to blame. “Lenders should take customers through an affordability check that allows for sudden life changes,” she says.
The Financial Ombudsman, which adjudicates in disputes between lenders and their customers, says it receives complaints from consumers with PCPs who are unaware that the MGFV must be paid if they wish to keep the car. Others complain about the cost of repairs and excess mileage charges demanded by finance companies. “We also see complaints about the way the agreements were administered,” said a spokesman.