Just Seventeen

Ash Wednesday, the start of the penitential season and a period of self-denial is hardly the most appropriate time to be thinking about buying a car. But by falling on the 1st March this year, Ash Wednesday coincided with the launch of the ‘17’ registration plate and a new round of cars available to buy.

There’s nothing quite like a new car, the smell, the novelty of having 3 miles on the clock and, in my case, kangaroo hopping down the Alum Rock Road in search of the elusive second gear! But unless you have a few thousand stashed away in your sock drawer then you, along with around 80% of all car buyers, have to negotiate the many and varied ways of securing a car on credit.

Almost every car dealer will offer you car finance – it’s a big source of profit for them – and the choice can be confusing.  A few years ago car finance automatically meant hire purchase but now there are a number of different ways, personal loans, leasing, and even credit cards to help you drive away your dream car but I’m just going to look at one of them; the most popular, and the one with the most pitfalls.

The Personal Contract Plan – Often advertised with headline monthly repayments that seem almost giveaway. The PCP has three components:

  • the deposit – the percentage value that you can afford to put down
  • the monthly repayment – determined by the size of the deposit and the cost of the finance (typically between 7% and 14% APR)
  • the final lump sum (balloon payment) – the amount you defer; set by the finance company, officially called the minimum guaranteed future value. The lender guarantees that your car will be worth that amount at the end of the contract. Providing – and here’s where the small print kicks in – you have correctly estimated your mileage (if not you’ll be charged around 10p a mile for each mile above the estimate) and the car is in good condition – any damage decreases the value.

Too good to be true? Well problems seem to arise when the contract ends and you are faced with one of three options:

  • Pay the deferred sum and keep the car – If you decide to purchase the car you will usually find that the PCP has worked out more expensive than a personal loan – particularly if you need to take a loan to meet the final payment and you don’t qualify for a low rate or need to take finance from the dealer.
  • Sell the car privately to fund the final payment – selling a used car always has risks, and buyers are now very wary of buying a second hand car that may have thousands of pounds of debt attached to it.
  • Hand the car back to the dealer – the obvious answer but can also cause problems. While this clears the debt to the dealership, it can leave you with no deposit for a future PCP. Likewise a car handed back may be considered to have no equity in it but this does not prevent the dealer from selling it on for more than the guaranteed future value. All’s fair in car finance?

It’s no surprise then that car finance is currently under investigation by the regulators, with PCPs giving the most cause for concern and critics claiming they could be the next mis-selling scandal. While the monthly instalment may be attractively affordable, the final ‘balloon’ payment is often not, and can cause the borrower to over extend their credit, lose the car or experience more serious financial difficulties. So despite the ‘driveaway deals’, in the long run it may be cheaper to finance your next car through a personal loan that has been assessed on affordability. Plus the payments on a personal loan will come to an end, and unless you have bought a complete turkey you could enjoy quite a large window where the only outgoings on the vehicle are the tax, insurance, MOT and annual service, allowing you to put money away in your sock drawer (by sock drawer I mean credit union account) towards your next dream car.

Hilary Sams is CEO of Churches’ Mutual Credit Union and a Reader in the diocese of Birmingham