There are a number of ways to finance the purchase of a new car. One of the most popular ways is to enter into a personal contract purchase agreement. These have come under scrutiny in recent years and a large majority of them have been missold.

I'll explain how it is that they have been mis-sold.

A car will traditionally reduce in value over time. The reduction in the value of a car is a result of a number of factors, including the depreciation caused by the use of the car, wear and tear and the introduction of new brands or models into the market .

In order for Tim, our fictional customer, to drive around a new car for the next four years, he would have to pay for the depreciation caused by usage, wear and tear, etc of £40. This would mean that Tim does not have to pay £100 for the car at this stage but only £40.

Accordingly Tim could drive away in a new the car with a car finance agreement to pay a lot less money than he otherwise would have if he were purchasing or taking out a loan for £100, the full value of our fictional BMW. At the end of the four year period, Tim would have the option of either returning the car or trading in the car for another car if the car has equity in it or simply paying off the remaining balance by making a balloon payment. This is why PCP agreements are generally cheaper than other forms of finance and are therefore more attractive at first blush. However, there are some serious issues with PCP agreements which generally come to light at the end of the term.

The first problem is if the value of the vehicle at the end of the term is more than the anticipated value. For example, in the case of Tim, if the value of the vehicle is £65 as opposed to £40, then Tim who would have paid £60 via finance, with the resultant interest, has arguably overpaid for the use of the car over the four year period. The calculation as to what Tim was asked to pay would have been based on the projected value of the car at the end of the four year period. If these projections are unduly low, then Tim would have ended up paying more money during the four year period and interest on that money than he should have. This should have been made clear to Tim at the start of the agreement, and if it has not been made clear, then, in these circumstances, Tim has been missold.

If Tim pays the balloon payment at the end of the term, even if the value of the car has not depreciated as expected, it would initially appear as if Tim has made a profit as he would only have to pay the amount that was initially agreed. The issue with this, however, is that Tim would have already paid interest on the additional amount/value of the vehicle, thereby paying more than he should have paid even if only by way of additional interest on the underestimated value. In the example above, Tim really should have simply had to pay £40 as opposed to £60.

In addition to this, realizing the increased value of the vehicle will inevitably involve Tim selling the vehicle ,to get his overpayment back. This is unfair and would not have been the case had the lender made the appropriate assessment. Tim would have had the car and his money in his pocket. In these circumstances, it is right that he be compensated by the return of the overpayments.

In the third instance, if the vehicle is worth less, then Tim is left in a position where he may have to not only make the balloon payment but also potentially take out another loan in order to meet the reduction in the value of the vehicle. This may ultimately result in Tim losing the vehicle and then making payments for the shortfall in the value of the vehicle. In all of the above scenarios, it is arguable that the finance has been had Tim not been made aware of these possibilities.

If you feel that your PCP contract has been missold, or a contract in the past left you out of pocket, please contact us and we'll be happy to assist.

Ingram Toft. Providing Professional Claims Advice and Assistance.

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