Britain's preferred car-loans are incomprehensible financialized garbage: what could go wrong?

Thinking of buying a car in the UK? Good news! You can get a personal contract purchase (PCP) and it will cost you less to buy a new Merc than it would to buy a used Ford Focus.

The only problem is that pretty much no one understands how PCPs work, and also 80 percent of all new car sales in the UK are made with PCPs. Also, they make more money for car dealers and manufacturers.

So what could possibly go wrong with millions of people using financial instruments that no one understands to buy big ticket items? After all, a PCP is just "a hybrid of several different financial products, part lease, part hire-purchase, and part option to choose between the two" with many different, ever-fluctuating, extremely complex variables that can shift the total cost to the buyer by huge swings.






It is difficult to explain quite how PCPs work, but easy to see the problem. Graham Hill, of the National Association of Commercial Finance Brokers, told the FT recently that using a PCP, drivers could pay less for a new BMW or Mercedes than for a second-hand Ford Focus. Or, as Bob the Dinosaur might put it, "they just make you sign papers!"

This miraculous effect is achieved by endlessly rolling over one quasi hire-purchase into another one, never quite buying a car. They are flattered by a buoyant used car market that is likely to sag before long. Yet manufacturers like them because they encourage people to buy new cars more often; car dealers like them because they generate more commission; and customers like them because the monthly payments are low. If you're not worried yet, I have a car to sell you.

Personal finance sets traps for dinosaurs
[Tim Harford]