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Guest opinion: PCP regulations need to work for everyone

Martin Lane, managing editor,

The PCP industry is booming. Thousands of drivers every year walk off the showroom forecourt with a brand new motor and a freshly signed PCP agreement to go along with it.

The problem is many of these drivers aren’t going through the same stringent affordability checks that they might face applying for finance elsewhere and they don’t fully understand what they’ve signed up for. They may have the car keys but they don’t own the vehicle.

This is the motivation behind the FCA plan to crackdown on PCP financing, but they need to tread carefully or their interventions could end up doing more harm than good.

Stricter rules could be good news

Ensuring that PCP finance is affordable for the consumer is beneficial for both the car finance industry and car buyers alike.

The temptation to push through sales on the back of questionable financing could come back to haunt car dealerships. Selling loans that consumers can’t afford just creates problems for all parties further down the line. Chasing loan payments and re-possessing vehicles is not only time consuming but very expensive.

We’ve also seen massive finance mis-selling scandals in recent years which have cost the banking sector millions and cutting corners by selling PCP deals that people can’t afford could prove to be a ticking time bomb.

Clearer regulations around the affordability checks dealerships have to carry out could protect consumers and the industry as a whole from future litigation and cut the cost of chasing car buyers who can no longer afford their payments.

Transparency and variation

For greater regulation to be a true success, it needs to make PCP lending more transparent for the consumer.

Often PCP offers are incentivised by dealerships, in the form of extra discounts or free fuel. While these perks can be very attractive, they can mask the actual cost of the PCP itself.

While a PCP deal is the best choice for some, there are plenty of different vehicle finance options that many overlook simply because a PCP is the option given to them at the dealership.

Greater controls over PCP deals could mean sellers offer a broader range of finance options for consumers, giving them more choice over how to pay for their new set of wheels.

We shouldn’t treat PCP loans like a mortgage

Lots of parallels have been drawn between the housing crisis of 2008 and the current situation with PCP deals, where mortgages were being given without sufficient affordability checks.

New rules were introduced by the FCA to tighten up mortgage lending practices back in 2014, and while there have been a few bumps along the way, it’s proven to be a step in the right direction.

However, this doesn’t mean the regulator should apply the same principles to the car finance market. If the regulator rolls out similar rules without properly considering how PCP deals are used, it could stop borrowers from accessing finance without making great improvements to the sector as a whole. Simply put, PCP loans are not the same as mortgages.

While both are secured on a valuable asset that can be at risk if you can’t afford your payments, many drivers are using PCP loans to essentially hire a vehicle for a fixed term, in the same way you rent a property.

Should we worry about more regulation?

Whenever more regulation is discussed in financial markets there’s often a reluctance within the industry or concern that it could affect their business.

However, if it’s done well it could reform the vehicle finance market and work in the best interests of both consumers and dealerships.

Author: Martin Lane, managing editor,

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  • alext - 29/04/2017 11:46

    Martin, the many points in your article are well made and the motor industry should take heed of these.If I may comment as someone who does FCA audits on car dealerships, customers applying for PCPs DO go through the same checks as any other kind of finance - the process and the Rules are the same for all car finance applicants. You are correct to say some drivers do NOT understand how a PCP works and it is up to the dealership to ensure that this done correctly and professionally.The Lenders have a huge responsibility here and they need to hugely improve how they present the agreement to the customer. In particular they need to take the "balloon" payment out of the small print and make it more visible - i actually have to look VERY carefully to find the amount of the balloon payment in the agreement. The PCP is a great concept allowing thousands to "own" cars they couldn't before but Caveat Emptor - let the buyer beware springs to mind!