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Drivers face risks with PCP loans

Cherry Reynard
Written By:
Cherry Reynard

Drivers face a financial shock if their car is written off or stolen, particularly if their car is bought using a finance deal.

Over 80% of UK cars are bought using ‘PCP’ loans. This allows motorists to pay a deposit and a monthly fee for a fixed term. At expiry, they can either make a ‘balloon payment’ or hand back the keys.

Some depreciation is factored into the payments, but there is the potential for ‘negative equity’ if the car depreciates faster than anticipated. As such, there may be a gap between the residual price of the car and the actual value. Usually the dealer takes on this risk.

However, research award-winning data analytics company Consumer Intelligence points out that this can be a problem for motorists in the event of a car being written off or stolen. Its research shows that one in three (34%) motorists expect their insurer to pay out the purchase price of their car if this happens, with 78% who have bought on finance believing the outstanding loan would be cleared by their insurer or the other driver’s insurer.

In reality car insurance covers the market price of the car at the time of the accident or theft minus any depreciation leaving drivers to fund the shortfall for a replacement.

There is a specific insurance – Guaranteed Asset Protection (GAP) – that will pay the purchase price and cover any finance deals. However, it remains only lightly used: Consumer Intelligence’s data shows just one in eight (12%) drivers took it out when they last bought a car. Many believe it is over-priced.

Around one in five (19%) drivers said they’d claimed on insurance after a write-off or theft. Industry estimates show around 89,000 cars are stolen a year in England and Wales with around 384,000 written off.

John Blevins, Consumer Intelligence insurance pricing expert said: “It is worrying that so many drivers are confused about what their insurance will cover in the event of a write-off or theft and particularly for those who have bought their car on finance. It is bad enough to suffer a theft or a write-off but having to also deal with financial worries about getting a replacement in the aftermath adds to the pain. GAP insurance can be very valuable, and it is a pity that motorists are put off buying it because they don’t trust dealers to offer them good deal.”

Consumer Intelligence’s research found around 35% of customers buying through car dealers purchased add-ons with the most popular being breakdown cover taken out by 17%.

Other areas to watch out for when buying a car with PCP:
• You’ll usually need to stay with the same dealer to use any remaining equity in your car as a deposit for a new car.
• Mileage fees – if you go over your mileage restrictions, you will have to pay a fee. This can be as much as 10-15p per mile.
• It may be cheaper to get a conventional loan – you can end up paying more with a PCP than with other types of car finance.
• Excessive wear and tear and damage will incur costs. Reputable garages should have a matrix of indicative costs. Alternatively, get them repaired ahead of time.
• You can end the deal early, but you need to have paid half the value of the vehicle.