A Personal Contract Purchase (PCP) has no legal definition, rather it is a term that has been used by some finance companies as a marketing label for simple hire purchase or loan contracts. Under a normal hire purchase or personal loan agreement you make monthly payments of the same amount and after the term of the agreement expires you own the vehicle. With a PCP you make smaller monthly payments than under a simple hire purchase or loan agreement, but at the end of the agreement you are left with a “balloon payment” which may be as much as half the value of the vehicle. Under a PCP you do not own the vehicle until you have paid the balloon payment.
Why are PCPs favoured by car salesmen?
A key attraction of PCPs for car manufacturers is that the most common choice at the end, or near the end, of the agreement involves the customer returning the vehicle (in order to avoid the balloon payment) and entering into a new PCP. This effectively locks the customer in to buying a particular brand of vehicle.
What is the problem with PCPs?
PCPs may suit customers who wish to change their car every 2 to 4 years. But for customers who want to own their car come the end of the loan agreement, a PCP is usually not the best type of agreement as the customer will end up paying more in interest payments than under a simple hire purchase or loan agreement.
Why are PCPs in the news?
PCPs are in the news because in March 2019 the Financial Conduct Authority (FCA) published the final findings of its review of the motor finance sector. One of many striking findings by the FCA was that “some customers are paying significantly more for their motor finance because of the way lenders
choose to remunerate their brokers”. Here, lenders are car finance companies, such as BMW Financial Services (GB) Ltd – brokers are the car salesmen. The FCA report goes on to describe a concern that lenders are encouraging brokers to sell PCPs – presumably so that the customer is “tied in” to a particular brand of car.
How does a lender persuade a car salesman to sell more PCPs?
By paying the car salesman higher commission. Simple!