Car finance has become a major part of how Britons fund their vehicles, with £51 billion in new lending agreed last year alone. Yet, despite its widespread use, it remains one of the most criticised financial products in the country. Among the various options available, Personal Contract Purchase (PCP) is by far the most dominant – and arguably the most problematic.
In this article, we break down how PCP finance works, why it’s so popular, and what buyers need to watch out for before signing a contract.
PCP: The Dominant Force in UK Car Finance
Currently, there are around 6.2 million active car finance agreements across the UK. Of those, more than 90% are PCP deals. Once seen as a convenient alternative to traditional hire purchase agreements, PCPs have now become the default option for many drivers looking to get behind the wheel of a new or used car.
But this growth in popularity comes with a cost. PCP deals have quickly risen up the list of the most complained-about financial products. In just the first quarter of this year, nearly 4,500 complaints were submitted to the Financial Ombudsman – second only to current accounts.
Understanding How PCP Works
PCP differs from a standard loan in that you’re not paying off the full value of the car. Instead, you cover a portion of the cost over a set contract period – often two to four years – with monthly payments that include interest.
At the end of the contract, you have a few options: pay a lump sum “balloon payment” to own the car outright, return the car, or start a new PCP agreement on a different vehicle. The flexibility appeals to many drivers, especially those who like upgrading to newer models regularly.
The concept is similar to mobile phone contracts – you’re effectively renting the latest model with the option to keep it later, but many opt to trade it in for something newer.
Why Businesses Love PCP – and Why You Should Be Cautious
PCP finance isn’t just beneficial for consumers. Dealerships, lenders, and insurers all stand to gain, often significantly, from these arrangements.
They can earn profits by:
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Selling various optional insurance add-ons like gap insurance or cosmetic repair cover
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Avoiding maintenance costs, as customers usually remain responsible for vehicle condition
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Reselling returned vehicles at a profit
And it doesn’t stop there. Customers often face additional fees and unexpected costs, which can catch them off guard if they haven’t read the fine print closely.
The Hidden Costs and Complexity of PCP
One of the main criticisms of PCP is its complexity. Even financially savvy consumers can struggle to understand all the terms, which makes it easier for hidden charges to sneak in.
Common pitfalls include:
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Excess mileage charges if you exceed the agreed limit
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High repair costs for any damage considered beyond “fair wear and tear”
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Large final payments if you want to keep the vehicle
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Rolling into a new contract before settling the old one, which can lead to a cycle of debt
It’s also worth noting that the flexibility of PCP can be deceptive. While it offers the allure of low monthly payments, it can end up costing more in the long run compared to other finance options – especially if you’re constantly trading in for newer models.
Is PCP Right for You?
For some, PCP can be a useful tool – particularly those who prioritise driving a new vehicle every few years and are confident about sticking to mileage limits and keeping the car in good condition. However, it’s crucial to approach these deals with caution.
Take the time to compare all options, including hire purchase or even personal loans, and make sure you understand exactly what you’re signing up for. Read the full contract carefully, ask questions, and don’t be pressured by sales staff into agreeing to extras you don’t need.
Final Thought
While PCP finance offers a shiny new car and manageable monthly payments, it’s not without its risks. The structure may seem simple on the surface, but the true cost can be hidden in layers of complexity, fine print, and additional fees. As the number of complaints continues to rise, drivers would do well to think twice and do their homework before committing.