13th December 2017

Every one a 'go-er'

In Arthur Daley's Guide to Doing It Right, Arthur offers advice on "how to buy and sell a motor" amongst many other things. But one thing he did not offer advice on was PCP (Personal Contract Purchase) method.

There is some speculation that the next scandal in the world of financial services miss-selling is the dreaded PCP. 

The chances are that for many ‘buying’ a new car, the sales’ person’ at the car dealership will suggest/ cajole you into using this type of scheme. It is so popular that last year figures from the Finance and Leasing Association showed that 76% of all new car finance deals were done this way.

Motor manufacturers are very keen to promote new car sales. PCP was already popular in the USA when Ford introduced it to the UK with its 'Options' plan in 1992. It immediately proved popular and other mainstream manufacturers were quick to follow suit with PCP products of their own. 

PCP's key features are a 'front-end' very low customer deposit (in some cases none at all) and a final 'balloon' payment, a familiar term to describe lump payments made by the customer at the end of the term, the result being monthly payments that are typically far lower than those of a Hire Purchase (HP) arrangement on a car of the same value.

Today, the majority of franchised main dealers offer PCP deals on new cars, either underwritten by the manufacturer's own financial brand or a third-party finance company.

Figures show around 86 per cent of private new car purchases in the year up to June, some £18.billion ‘s worth, used dealership car finance, compared with about half in 2009. Meanwhile, the total stock of dealership car finance rose £30billion — three- quarters of total growth of consumer credit.

In April this year the FCA launched an investigation into the industry because it fears poorer customers may be paying too much for credit and not focussing on the real crux of the matter as to whether they should have credit at all.

Are these deals all they are cracked up to be? Will the value of used cars plummet either because the UK has reached ‘Peak Car’ or the default rates will see a meltdown of the funding sources?

Some lenders are calculating finance deals based on some very optimistic vehicle values but when these values are not achieved the loss potential is huge. It is made worse if the vehicles are returned before the agreement end and even worse if a vehicle is repossessed due to non-payment.

Getting out can be very difficult as the only way open to car buyers who have paid a really small deposit (or in some cases none at all) before any break clause option (normally 50% of the amount borrowed needs to be repaid) is to pay back the existing finance- that may not be possible particularly if the value of the car is less than you borrowed as the sell option has disappeared.

So time for conspiracy theories. Car manufacturers need to shift their stock To do so, they have a string of dealerships nationwide These are costly to run with administration, servicing, sales Does this sound familiar? 

It should do as the UK mortgage market, pre crash and RDR, had many of the same issues.

To shift mortgage ‘stock’, they worked with large distribution chains. Many lenders were, possibly still are, paying large sums to sit at their table on top of commissions.

So what next for the PCP?

Most cars lose between 50 and 60% of their value in the first three years of ownership.

Here is a list of the top 10 worst cars to buy for depreciation.

If you bought a Vauxhall Astra three years ago its value will have dropped from £24,465 to some £5,700.

As the great Arthur Daly, businessman and entrepreneur said “You make contact with your customer. Understand their needs. And then flog them something they could well do without.”

So just do the sales math.

If the car manufacturer makes profit, the sales guy gets rewarded, the dealer makes profit, the finance deal produces commission, when the car is returned at the end of the PCP, or sooner, how can this auotmotive pass the parcel game make for a viable business model?

All the ingredients in fact for another financial services scandal for the claims management industry to feed on.

Just a thought.

Panacea Comment, Regulation