Experts warn: PCP and HP are the Road to Ruin

Experts warn: PCP and HP are the Road to Ruin

17 November 2020 Concept Car

Financial website This is Money has issued a strong warning against PCP (personal contract purchase deals) and HP (hire purchase). According to their experts, these financing options are far too complicated for the average consumer and may result in excessively high costs if something goes wrong.

The warning is not the first of its kind. But it is particularly relevant, as these are now by far the most popular car finance options in the UK.

HP and PCP Car Finance have their advantages

Without a doubt, they did not become this popular without a reason. Thanks to a clever concept, HPs and especially PCPs put great, new cars within reach of far more drivers than ever before.

Compared to a personal loan, the entire process is a lot more straightforward. Whereas personal credit will usually require a lengthy application, extensive documentation and, potentially, unpleasant interviews, car dealers are almost begging you to accept their car deals. In some cases, you could be driving home with a brand-new vehicle the same day.

At the same time, monthly rates are far lower than what you’d usually have to pay. For example, PCP deals have a guaranteed minimum future value, offering lower monthly repayments. And if you are not entirely satisfied, you can simply call the whole thing off after three years and walk away from the deal.

How is this even possible?

HPs and PCPs aren’t magic – they’re clever accounting.

Car Finance at Concept Car Credit

HP is very similar to leasing. When you sign the contract, you are not yet the owner of the car. Only after paying off the entire loan (often referred to as a balloon payment) – which could take a while – does the vehicle truly belong to you. However, leasing contracts are designed to run for just three years and do not include the option of owning the car. HPs, on the other hand, run for longer, require a deposit and shift all the risk to you. If you can no longer lease a car, you just opt out (there may be a minor penalty fee). If you can no longer afford an HP, you end up with nothing.

PCPs are even more strange.

Again, they’re closer to leasing than buying. And, in fact, the vast majority of PCP users don’t end up buying the car in question.

PCP deals consist of two phases:

Phase one – you agree to pay a monthly contribution to use the car. This contribution is calculated on the basis of the predicted depreciation of the car. So if the value of the car in the beginning is £10,000 and after three years, it’s £6,000, you will need to pay off the difference of £4,000 plus interest.

After phase 1 has ended, you have three options:

  • You can decide to pay off the remaining £6,000 plus additional fees and keep the car.
  • You can end the deal right there and take your business somewhere else.
  • You can ask for a new contract with the same dealer, which would give you a new car for another three years.

What happens if you can no longer afford your monthly payments?

This is the main reason behind the criticism by This is Money. In their example, a couple signed a PCP contract for a Seat Arona. After six months, one of them got laid off as a consequence of the Corona measures. Unable to find a solution – the finance provider wouldn’t return their messages and calls – they felt they had no other choice but to opt for voluntary termination.

Voluntary termination doesn’t sound very bad. But, this is one of the worst things that can happen to you. When you stop making payments to your lender, this is what is going to happen:

  • You have to return the car.
  • The car will be auctioned off.
  • You will not get the proceeds of the auction. If the vehicle underperforms, you will need to pay the difference between what you were due and the actual proceeds.
  • Interest is still due on this amount.

In the case quoted by This is Money, the couple even had to pay an additional penalty fee, as their contract did not allow for voluntary termination.

The result? They had to pay over £10,000 for just six months of driving a fairly average car.

PCPs and HPs are way too complicated.

PCP agreement vs HP finance

PCPs and HPs sound fairly straightforward on paper, but they are not particularly organic concepts. PCPs especially are neither fish nor flesh. Their entire calculation is based on you NOT buying the car. Or, to be more precise, they’re based on you not being ABLE to buy the car.

If you do buy the car, PCPs are just a bit more expensive than a dealer loan. So why would you make use of them?

If you do not buy the car, however, and instead sign a new contract under similar terms and conditions, they are, in terms of interest, among the most expensive options at your disposal.

The deposit is non-negotiable

When looking at hire purchase agreements or PCP, most car buyers focus on equal monthly payments.

That’s not a bad thing per se. You need to be able to deal with these recurring costs, after all. In fact, most finance deals eventually fall through not because the car was too expensive, but because the monthly burden of repayment was too high.

Still, you shouldn’t put all your focus on the monthly payments.

The deposit is an important part of any car finance deal. And depending on the amount you need to pay upfront, they can be a serious issue.

Now we’re the first to stress that a deposit has its benefits. If applied wisely, it can save you a lot of money and bring down the loan term considerably. However, if you’re strapped for cash, it can also palpably limit your financial freedom.

Besides, you may simply not have enough money saved to afford a deposit.

Therefore, you need to understand that with PCPs and HPs, a deposit is non-negotiable. And should you, at any point in the process, have to default on the loan, your deposit is gone forever.

Insurance problems

The Telegraph has warned that PCPs and HPs create the illusion that you’re protected against financial ruin.

This is an illusion which can turn out to be costly.

If you cause an accident with a car on one of these two plans, you will have to deal with all associated costs yourself.

The same applies if the car gets stolen. PCPs and HPs do not provide insurance for these events.

Additional costs

PCPs in particular sound too good to be true. Believe us, they’re not.

Auto Express has correctly pointed out that these deals make dealers look good because they appear to be so cheap. But dealerships want to make money, too.

One way of doing this is to limit the amount of miles you can drive under the contract.

If you only need the car sporadically or if you’re only driving short distances, this won’t be a problem. But as soon as you need an hour each morning to get to work, you could be in trouble.

This is because the penalty fees for exceeding your allotted mileage can be substantial.

In some cases, the mileage restriction ruins any benefits the PCP might otherwise have. So before you commit to your finance agreement, make sure you know if you can stay within the mileage limits specified by your contract.

What happens at the end of your PCP agreement?

The day you sign your PCP deal is a great day – it’s the day you get to drive home in a car that at one point was far outside your financial reach.

But when the contract terminates, things no longer look quite that rosy.

The Money Advice Service warns:

“Excessive wear and tear and damage, such as scratches, can mean you’ll receive additional charges. […] To end the deal early or cancel it, you must have paid half the value of the vehicle. If you haven’t, you’ll need to pay the difference before you can get out of the contract. The car will need to be in good condition too, or you might be charged for repair costs.
Almost one in five people who take out a PCP deal say they can’t afford the final payment, and then feel they have to get a new PCP deal so they’ve not wasted the investment made into the first car.”

Ultimately, you will have to crunch a lot of numbers to establish how attractive PCPs and HPs really are for you.

And that’s only the beginning – the real problems begin once you start looking into the fine print.

Says consumer campaigner Martyn James, of Resolver:

“PCP is so complicated I would hazard a guess that most dealerships don’t understand it themselves. In my 20 years’ experience, these deals are more complex than most pensions.”

What about leasing your next car?

If most PCP users don’t end up buying the car, why not just lease it in the first place?

Regrettably, the result would be pretty much the same. In fact, even some of the typical terms and conditions apply – such as penalties for not keeping the car in a perfect state or exceeding a mileage limit.

And, in both cases, you can switch to a different model after the contract has expired.

However, one benefit of leasing is that it is more flexible – you can terminate your contract far easier in case of a financial shock.

Now, leasing is indeed a bit more expensive than PCP or HP. In fact, it may well be the most expensive option out there. But it is extremely comfortable.

A standard leasing contract includes most repairs and regular check-ups. And because you’re changing cars every 2-3 years, you always have access to the latest safety technology.

So, what’s the difference?

Criteria PCP HP
Fixed monthly payments
Applied interest
Repossessed if no payment
Credit checks completed
Own the car at the start of the agreement
Option to return the car at the end
Ownership at the end of the agreement
Limits on mileage
Equity build-up possible

Buying a used car

To sum it all up – PCPs and HPs look very attractive in theory, but they’re pretty problematic in practice.

Of course, you could weigh the pros and cons and base your decision on that. Alternatively, you could do the most sensible thing by far: buy used.

In terms of cost, used cars are by far the best option.

Yes, interest rates tend to be slightly higher than with a new model, but you still win out because of the far lower purchase cost. Also, when it comes to used cars, depreciation is close to zero, which makes the second-hand market a far better investment.

Although you won’t be getting that famous new car smell – which is not that great anyway, if you ask us – second-hand vehicles are absolutely incredible and will give you plenty of driving pleasure for years to come.

Concept Car Credit: Used car specialist

Looking for a reliable used car? The team here at Concept Car Credit is happy to help. As a broker, not a lender, we have a range of finance deals to suit every need.

In our digital showroom, you can find a wide selection of some of the best, used vehicles currently available at fantastic prices. Simply click on the model you’re interested in for car details and information on how to start your financing journey.

And if you need a finance solution to go with it, just apply online today – we can usually give you a quote on the very same day.

Team Concept Car Credit - Find your next used car online at Concept Car Credit

Frequently Asked Questions

Is PCP a good idea?

PCP car finance is when an agreed percentage of the vehicle’s value is used as a deposit and the rest is paid in a series of monthly payments.

When this contract ends, you can either trade in for a newer model, pay the remaining sum to own the car or go elsewhere and start the process with another finance company.

Many people opt for PCP because they don’t have to worry about selling the car once the contract has ended, the monthly payments are much lower than HP and you can trade in regularly for the latest edition of your chosen car.

However, there are often more terms and conditions – including agreed mileage, a large final payments and tend to only be available on newer (more expensive) cars.

How does HP car finance work?

With a hire purchase, you own the car at the end of the agreement. The agreement can be as long as you need – with most people opting for 12-24 months, there is the possibility of spreading it over 60.

The total cost is broken down into equal monthly payments and an initial deposit, plus interest.

At the end of the agreement, you can either keep it or sell it.

Key benefits of HP finance are that there are no mileage limits or damage charges, it’s available for used and new models, and you don’t have to pay a large sum to own the car at the end.

However, the initial deposit and monthly payments are often more than PCP, you can’t exchange your car whenever you want and as the payments are spread out over a longer period, the interest may be higher.

What are the benefits of HP and PCP schemes?

Generally speaking, they require lower monthly payments than personal loans. That’s great news if your budget is limited or if you don’t want to dedicate too much of your resources to driving a car.

They are not as excessively expensive as, say, a payday loan. Although there are many issues with these finance options, they are certainly respectable enough to at least present you with a viable alternative.

They allow you to drive a new car and more upmarket models at a seemingly attractive price.

It goes without saying, however, that these undeniable benefits come at a cost, and with lots of loopholes, it’s vital you take the time to understand the differences before signing on the dotted line.

What credit score do you need for PCP finance?

When looking into financing a car, your credit rating (or score) is usually looked at.

However, there isn’t usually a minimum score to be eligible for PCP.

Here at Concept Car Credit, we don’t believe a credit score is the be-all and end-all. We aim to get as many people as possible behind the wheel of their dream car, regardless of their financial situation.

To learn more about our financing deals, call us today!

17 November 2020 Concept Car