There has been a lot of adverse publicity around Personal Contract Purchase in recent months, much of which is technically incorrect and some of which is blatant journalistic sensationalism.
In the interests of providing a counterbalance to some of the wild claims about PCP’s, it’s worth reminding ourselves of the actual facts.
Firstly, PCPs are not new to the market, like some commentators have argued. We haven’t just invented a mythical and magical way of acquiring vehicles. It is nearly 30 years since Ford introduced Options and before that, many premium vehicles were financed with residual values profiles, on lease purchase and lease agreements.
This is a concept that is decades old, particular for business user transactions.
Secondly, PCPs are not designed to put customers into vehicles they ‘cannot afford’. On the contrary, PCP’s are designed to give higher levels of affordability, for a given budget. In particular, premium vehicles, with strong residual values, become attractive under these schemes.
This is part of the reasons why the German brands have had such strong growth, over the last decade.
The adverse publicity also pays scant respect to the higher level of consumer protection that PCPs provide over other loan products.
Right of withdrawal, termination rights and a guaranteed buy back are all designed to provide the consumer with higher protection rights.
Conservative balloon payments, pegged back behind the residual value of the vehicle, give further flexibility in volatile markets and an excess mileage charge, provides a mechanism to prevent excess contract mileage and preserve resale too.
In a market where used prices are under pressure, PCPs are the product of choice and is the only financial product that will protect the consumer from falling used car values.
Other incorrectly reported facts stipulate that PCPs are a ‘leasing’ product. They are, as we all know in the trade, a simple purchase product. And yes, you do, ultimately, pay for the whole value of the vehicle, including interest, not just the depreciation of the product.
I find it unfathomable that PCP’s are, incorrectly, being demonised. PCPs are probably the greatest automotive financial mechanism the trade has seen. This is before we get into the other tactical benefits, such low interest rates, deposit contributions, built in service plans and redemption simplicity.
The current high penetration of PCPs emanate, from the fact that consumers have really grasped the benefits and effectiveness of PCPs and not because dealers are ‘mis-selling’, or ‘misleading’ customers.
Just because something is so popular, doesn’t mean there has to be a case of misrepresentation going on? In fairness, the mechanics of PCPs could, potentially, be explained better by some dealers and deploying specialists business managers more consistently would ensure a more robust customer understanding.
The Financial Conduct Authority (FCA) has announced a probe into the UK motor finance market.
It is, indeed, their prerogative as the regulator to ensure that irresponsible lending does not take place.
Regrettably, they seem to already have a preconceived perception about the product, stating that they are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry.
If they do take action, once again dealers and finance houses, who have an excellent record of adapting to the regulators, will have to adjust again, to something that is not broken, in then first place.
The FCA themselves, should first fully understand how these products work. The irony is not lost on me that the FCA seem to think consumers themselves don’t understand the product, when in actual fact, the FCA probably don’t either.
The Finance and Leasing Association (FLA), got the mood right and alluded to this issue themselves, when they were quoted to say: “The motor finance industry is committed to responsible lending and to high standards of customer service.
“We will continue to work closely with the Financial Conduct Authority, to ensure they have a good understanding of this highly competitive and diverse market.” Quite.
Author: Robert Newbold, director, Invicta Automotive Ltd