Car finance: Top 10 PCP myths busted
https://www.thecarexpert.co.uk/car-finance-top-10-pcp-myths-busted/4/
PCP Myth #9: There’s no risk because of the GFV
If you need or want to change the car before your PCP ends, any negative equity is your problem, not the finance company’s (see Myth #6) because you can’t claim the guaranteed value until the end of the agreement.
If your financial circumstances change during the course of the agreement for any reason, you still have a large debt that needs to be paid off.
If you lose your job, get sick, have unexpected legal costs or anything else pops up that stops you from paying your monthly PCP bill, you will eventually find yourself in trouble and the finance company will be looking to reclaim every penny you owe – regardless of what your car is worth.
You will probably end up in a voluntary surrender position (as we discussed in Myth #5) and be doorstepped by collections agents before long.
Also, as we outlined all the way back in Myth #2, PCPs are usually sold on the promise of equity at the end. If the value of the car drops below what’s expected, your expected equity goes out the window before the finance company starts losing anything.
As we all found out during the credit crisis of a decade ago, normal borrowers lose their shirts well before the bank starts to suffer. Even if they do lose, you will have already lost too.
Warnings
The speech was not entirely positive, and he added: “However, we are also seeing that arrears and default rates, while still low, are on the rise, particularly for higher credit risk consumers. This is despite favourable credit and economic conditions, which begs the question: if we’re seeing this pattern now, what would happen if there was an economic downturn?”
He also pointed out that the financial situation for some remained precarious, in particular the younger generations facing large student loan repayments, higher costs to get on the housing ladder, and generally low savings levels. All this could be exacerbated by rises to interest rates.
With this in mind, Davidson emphasised the importance of affordability checking in addition to credit checking.
Although he noted that the FCA did not want to be overly prescriptive on consumer credit checks, he said: “Our guidance to firms highlights areas for you to consider – including the future financial commitments of the customers, and the future changes in their circumstances.”
To this he added: “It seems like common sense to ask and answer questions like – what might happen if rates rise? What might happen if the cost of living rises? Are there indicators that a customers’ circumstances – for example their job situation – could change?
However, I fear that common sense might not be that common. We have seen a lot of firms not doing affordability checks or just doing credit checks.