Car finance - Do you know your PCH from your PCP?

young woman being given keys to a new car
If you’ve ever been baffled by the huge range of finance deals available when buying a car, you’re in good company.


Sales of cars might be soaring, but the financial jargon associated with the finance packages we use to fuel the purchase is driving us round the bend.

Sales bonanza

Latest figures from the Society of Motor Manufacturers and Traders (SMMT) show that record numbers of us are snapping up new cars, with the increase being attributed to cheap finance packages. Registrations of new cars in the UK grew by 7.0% in the first six months of 2015, making it the highest half-year total on record. Over this period, 1.376,889 cars were registered, beating the previous record on 1,376,565 in the same six months in 2004. A spokesman for the SMMT said; “Low interest rates and attractive finance deals, combined with a wealth of new models featuring the latest technologies, have continued to encourage consumers to purchase new cars.”

Consumer confusion

While bargains deals are luring us to buy, many of us are far from certain about what we’re actually signing up for. New research from BMW Financial Service reveals that understanding of car finance deals is in fact at an all-time low. This is pretty worrying when you consider that city regulator, the Financial Conduct Authority, has tightened guidelines surrounding transparency.

Language barrier

Often it’s financial jargon that catches us out. Of more than 1,000 people questioned by BMW, two-thirds said they wouldn’t feel confident explaining terms such as annual percentage rates (APRs), unsecured loans and deposit contributions. The most confusing term was considered to be ‘personal contract hire’ (PCH), with less than one in five people able to explain what this means.

When you sign up to personal contract hire, you are basically renting your car over a long-term period. You pay a deposit, and then make monthly payments until the end of the contract, handing the car back when it finishes.

Personal problems

The term ‘personal contract plan’ (PCP) also baffles drivers, with 19% of people confessing they wouldn’t have a clue how to explain them. With this kind of plan, you pay a deposit and then make monthly payments based on an agreed mileage and the depreciation of the car. At the end of the agreement you can hand the car back and walk away, or you can make a lump sum payment so that you own the car. Most buyers simply choose to replace their car with a new one after three years, and roll their finance deal over into a new three-year period.

Mind the gap

Gap insurance threw the same number of people. This cover is often sold as an add-on when you buy a car. It’s designed to cover the gap between the amount you paid for your car, and the amount your insurer will pay out as a claim once it has depreciated in value. Suzanne Gray, spokesman for BMW Group Financial Services, said: “It’s important for buyers to know exactly what they are committing to when they sign up to finance contracts. These results go a long way to illustrating the state of the nation’s knowledge about finance.” It’s likely to be a very long time, if ever, before car finance jargon disappears, so if you are considering using a financial package to buy new car, make sure you swot up on anything you’re not sure about first. You should never sign any financial contract without understanding exactly what you’re committing to. It might look a bargain now, but failing to understand how a particular package works could end up costing you dear in the long run.

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