Despite a major investigation into the mis-selling of car finance PCPs (personal contract purchase agreements) by the Financial Conduct Authority in 2019, which uncovered evidence of car buyers collectively paying £300 million more a year than they should have been, this method of financing a car is still proving a popular choice for millions in the UK, with the Finance and Leasing Trade Association’s members providing £45 billion of new finance to purchase cars in 2021.

What is PCP?

A PCP agreement is a finance package which enables you to spread payments for a car over a period of time, usually three or four years. A deposit is usually required, and then monthly repayments are due until the end of the agreement. At that point, you can choose between making a lump sum payment (also known as a balloon payment) to purchase the car outright, or use any equity built up as a deposit for a new car, and a new PCP agreement. Alternatively, you can return the car and walk away without taking on any further agreements.

Following the FCA’s report, it introduced a ban on discretionary commission models*, potentially saving car buyers £165m per year on finance plans. But that does not change the fact that countess car customers have been over-charged literally hundreds of millions of pounds over the last 10 years.

To help to try and right that wrong, consumer litigation law firm Johnson Law Group is now representing clients who were charged secret commissions and over-charged interest on their loans, and with their wealth of expertise in PCP car finance agreements, they have put together some top tips to help members of the public get the best deal on their new car:

• • Don’t be afraid to ask if a commission is being paid. And if so, how much? Then ask how is the commission worked out?

• • Ask if they set the interest rate – and how it is calculated.

• • Do not disclose what you can afford as a monthly payment, to prevent the dealership structuring the deal around that information.

• • Shop around for finance agreements and research different methods of financing the car before visiting the dealership so you know what options are out there – you don’t have to finance the purchase of your car directly through the dealership.

• • Most of all, come to the showroom well researched in what is the current level of interest routinely charged on loans.

Jamie Patton, Managing Director at Johnson Law Group said: “Perhaps the biggest shock from the FCA’s report was the revelation that sales staff could not only set the interest rates the finance company was going to charge customers, but actually got a bigger commission or bonus the higher the interest rate they could get away with charging. While the FCA investigation shone a light onto commission manipulation and evidence of widespread unclear and excessive costs within the car finance sector, it has not completely eradicated the problem. By asking a few simple questions before committing to your next PCP agreement, you can be sure you are not paying over the odds for your new car.”

Summary of the 2019 FCA investigation

If not properly managed, some of the commission arrangements provided incentives for dealer to arrange finance at higher interest rates.

• • Information on both websites and in contractual documentation was confusing and sometimes difficult to understand.

• • Some dealerships were doing credit checks to protect themselves but not affordability checks on the customers.

• • Most people were not told that they could shop elsewhere for their credit to finance the purchase of their car and instead were led to believe that they could only drive away the car they wanted by entering into the finance agreement offered by the car dealership.

As a result of overcharging, it was estimated that customers paid on average £1,100 per £10,000 borrowed over a 4 years period. For example, a car purchased for £30,000, may well have seen the buyer overcharged by £3,300. For people worried they may have been a victim of mis-sold car finance PCP, they can contact Johnson Law Group for a no-obligation consultation. JLG will also evaluate car financing agreements for free.

*With a discretionary commission model brokers are paid a fee which is linked to the interest rate payable by the customer.