80% of cars you see driving on UK roads have been bought using Personal Contract Purchase (PCP). But what actually is PCP and why are people comparing it to the PPI scandal?
Personal Contract Purchase is a form of buying a car over an extended period of time. The customer initially pays a deposit for a vehicle and then continues to pay a monthly sum for the duration of the contract. At the end of this period, the customer can choose to make a one-off ‘balloon payment’ to own the car outright.
So, why have there been so many claims against companies who offer this form of payment?
According to the FCA, over 560,000 motorists are eligible to claim against PCP, with the average payout being £3000. There are several reasons why the FCA believes customers may have been mistreated. One is that the contracts used in PCP are often complex. If not fully explained to the customer, they may make a decision that is against their best interests. This violates the core principle of the FCA’s Consumer Duty, which came into force earlier this year.
Another issue is with the interest rates for PCP agreements. 3rd party dealers took commission on PCP deals. However, they were incentivised to overcharge customers to earn a higher commission. This was done through elevated interest rates. In one incident, a car dealership was allowed to set the interest rate for the customer within a given range. They selected the highest possible value, which meant the customer ended up paying 25.5% APR on their PCP - well above the market average.
In addition to this, customers were often pressured into purchasing additional PCP specific insurance. This was on top of regular car insurance that is a legal requirement within the UK. The PCP insurance was unnecessary and the FCA found that often the customer was made to feel like that it was a legal requirement.
All of this has led to an influx of claims being submitted to the FOS. They reported an 87% increase in the number of complaints about car finance in the last year. This figure is only expected to increase as customers become increasingly aware of the issue.
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