The Guardian view on car finance: risky credit | Editorial

The idea that one can get something for nothing underlies much of modern-day marketing. This patter has been used to lure motorists into opening their wallets for vehicles they perhaps had considered beyond their reach. As our series on debt shows, personal contract purchase agreements, PCPs, now account for 80% of new cars sold. Drivers think they have chanced upon an extraordinary bargain: it is cheaper to pay for a brand new BMW than purchase a secondhand Ford Focus. They are motivated, no doubt, by the idea that the model and marque of car they drive will move them up in the pecking order of life. Mercedes has doubled its UK sales since 2010.

In reality nothing in life is free. PCP monthly payments are lower than hire purchase ones because they do not cover the whole cost of the car. What consumers are “buying” is the difference between the current value of the car – less any deposit – and the expected value of the car at the end of the contract. When the PCP agreement is over, most drivers still need a car. Their options are either: pay an agreed hefty lump sum to keep the car; hand the keys back and start again; or use the value of the current car to start again with a new finance deal on a different car. It’s the last option that drivers have been taking, relying on rising used car prices to provide equity that allows them to purchase a flashier motor or a deposit to reduce the next set of payments.

If prices fall, then drivers would either have to walk away or find the extra cash to finance their next PCP deal. These fears are not unfounded: the diesel emission scandal has already depressed secondhand car prices. The suspicion is that too many people are buying cars using financial products they do not fully understand. So we have incentives to make short-term profits by encouraging the taking of risks, which if they materialised would have bad consequences. We had a crisis built on greed. Let’s not have another.