‘Putting Customers under Pressure’: the true cost of PCP
If you’ve been following the news in recent months, in amongst all the politics, conflict and cost-of-living coverage, you may have seen another smaller, but quite significant story. The Supreme Court has heard appeals relating to potential mis-selling of car loans, including Private Contract Purchase and Hire Purchase agreements, with a judgment expected in the coming months.
Sounds all a bit legal-ese and boring? It shouldn’t. This ruling could impact millions of consumers who’ve bought cars on finance since 2007, with some estimates that over £30 billion in compensation could be on the table. This decision has the potential not only to cause significant economic ramifications, but also to reshape the future of how car finance deals are sold in the UK.
With much of the current spotlight focussed on issues surrounding hidden commissions and overcharging, here at Maru we were keen to understand whether this is the only headache on the horizon for car lenders, or if it’s just the tip of the iceberg…
One third of PCP customers felt pressured to take out their PCP agreement
Of all the questions we asked to PCP users, this was the statistic that really set alarm bells ringing. Let it sink in for a moment. One in every three customers with these agreements felt pushed into their decision. This would be a black mark on the customer experience of any sector, but when we consider the sums of money involved in car purchasing, it’s especially stark. Furthermore, our proprietary System 1 tools reveal that, even amongst those who say they didn’t feel pressured, nearly half had to really think about their answer – it wasn’t an instant ‘no’ – suggesting a level of uncertainty that reinforces potential issues around mis selling.
This lifts the lid on a much wider issue that may well take much more effort to address than simply offering up clearer paperwork. It hints at broader concerns around the sales process itself; how are dealers approaching these conversations? Are customers given sufficient time and space to review T&Cs in detail? And how are commissions and dealer incentives structured?
Pressured sales create surprise additional costs down the line that customers may struggle to afford
We also found nearly half of PCP users say they’ve been surprised by additional costs associated with a PCP plan (such as mileage penalties or condition-related charges at the end of the loan term). Worryingly, this rises to 60% of under 35s (who may have less experience of such agreements), and a whopping 85% of those who felt pressured at the outset. This really underscores how this pressure can create a situation where customers don’t fully understand the implications of the agreement. Some consumers flagged that they were ‘caught out’ by end-of-plan balloon payments, or additional charges for minor damage such as small scratches. Worryingly, one consumer told us that hidden costs were so high that they ‘impacted [their] ability to pay [their] bills that month’.
All of this is starting to paint a picture that we’re not just talking about the technicalities of whether commissions have been clearly laid out upfront; is the car finance industry taking appropriate responsibility for ensuring their customers can afford the loans they’ve been offered, including any potential penalties?
Whilst alternatives to PCP are relatively well-explained, potential risks and long-term financial implications need better clarification
One area that emerged relatively well in our findings was that 78% felt they understood alternatives to PCP (such as Hire Purchase, leasing or personal loans), based on what the dealer explained to them at the time. Reviewing some of the best practice in this area of negotiations may well reveal some key take outs that dealers can apply to other elements of the process, such as additional costs that may apply down the line.
In contrast, just over one in ten consumers felt that potential risks (e.g. negative equity, excess mileage charges, changes in interest rates) and long-term financial implications (e.g. balloon payments, potential refinancing) were not something they understood well from their interactions with dealers. Indeed, several customer comments told us that, until taking our survey, they thought they’d understood their agreement – but now they weren’t so sure, and didn’t know what would happen at the end of their term.
Admittedly, these are just some of the many details involved with such agreements, but they’re also pretty important ones. Balloon payments can stretch into tens of thousands of pounds, and when teamed with negative equity, can leave consumers in a Catch-22 at the end of the agreement. Fully understanding these aspects, with £ value examples, seems crucial to ensure consumers can fully appreciate the scale of any potential risk.
What does this mean for UK car financing?
Ensuring customers have the time, space and support needed to fully absorb and understand the details of their proposed car finance agreements is key; lenders should demonstrate clear processes that deliver this and thus remove any pressure that customers may feel. Our increasingly digital world offers a real opportunity here to remove some of the pressure of the ‘in person’ environment, giving customers space to consider the details. Ultimately, considering everything from the dealer’s manner and conversation points, through to timeframes, documentation and digital channels, will be vital to protecting the long-term customer relationship.
Clearly outline potential additional costs, potential risks and long-term financial implications in full upfront, in a prominent document location, with £ values associated. Use illustrative examples and calculations (relevant to each customer’s purchase/situation) to bring this to life, so that customers can understand what level of impact they may be looking at, so they can make an informed decision on affordability.
Almost regardless of the Supreme Court’s decision, damage has already been done to consumer trust in the sector. 81% of consumers agreed that more transparency is needed around PCP agreements moving forward. With that in mind, finance providers would do well to consider what public clarifications and reassurance they can make around any updated processes to address concerns; how can they show they have listened and heard customers’ concerns? How are they working to ensure customers fully understand their agreements and are making confident, informed decisions?
Several of these issues and actions mirror the best practice outlined in the Financial Conduct Authority’s Consumer Duty legislation, which came into effect in July 2023. Part of the act outlines the need for financial providers to ensure customers can make informed, effective decisions and understand the information provided to them. Our survey data demonstrates how important it is not only for providers to ask customers if they understand their documentation, but also to test specific areas of understanding relating to each document; many of our respondents thought they understood their agreements until we asked about specific topics. A best-in-class approach to Consumer Duty evaluations will probe deeper into exactly what customers’ key takeouts are from each document.
Clearly, there are some challenges ahead for PCP. Fortunately, here at Maru we work with brands to shape mutually beneficial experiences for customers, colleagues and businesses.
Get in touch if you’d like to have a chat and find out more.