The risky loans that let drivers on minimum wage buy a £19,000 sports car and could be fuelling a debt crisis

A gleaming fleet of luxury cars is spread across a vast showroom in Buckinghamshire. In a room behind a large glass wall sits a slick BMW salesman.

‘It’s a no-brainer, honestly,’ he says, leaning back on his leather office chair, his grin widening as he senses a sale.

He’s trying to flog a BMW 1 Series M Sport worth £27,000.

That’s more than the average salary in Britain today. But the salesman explains that for a £1,000 deposit and then just £319 a month — around a tenner a day — Money Mail’s reporter can drive it off the forecourt that day.

Debt fears: Drivers earning as little as £8,200 a year can walk away with a brand new £12,500 Ford Fiesta, Britain’s most popular car

It sounds too good to be true. Yet every day, flashy cars are being snapped up by motorists on modest incomes.

An investigation by Money Mail found that drivers earning as little as £8,200 a year can walk away with a brand new £12,500 Ford Fiesta, Britain’s most popular car.

You would need to earn just £13,500 to be able to afford a Mazda MX-5 — a flashy Japanese two-seater sports car that’s worth roughly £19,000.

To put that into context, someone who is on the minimum wage of £7.50 an hour could earn £15,600 a year by working 40 hours a week.

You’d need a salary of £20,000 to buy an Audi TT, which starts at £28,500; while a Range Rover Sport, a £60,000 luxury 4×4 off-roader, requires an income of £41,000 a year, according to figures from car finance broker

Its calculations showed that we would have needed a salary of £18,000 to take away that BMW 1 Series being pushed by the salesman in Buckinghamshire.

No wonder car sales are soaring in Britain. Indeed, dealerships shifted a record 2.7 million new cars last year — the fifth consecutive year of rising sales.

Fuelling the boom is a relatively new type of finance called Personal Contract Purchase (PCP) — a type of lease agreement that dramatically cuts the monthly cost of owning a car.

Status symbol: A Range Rover Sport, a £60,000 luxury 4×4 off-roader, requires an income of £41,000 a year You’d need a salary of £20,000 to buy an Audi TT, which starts at £28,500. Dealerships shifted a record 2.7 million new cars last year — the fifth consecutive year of rising sales

As many as nine in ten new cars bought on finance are done so using PCP deals — £160 million in loans a day.

These can be more than £200 a month cheaper than taking out a traditional loan, so drivers can afford more expensive cars than they would have done if they had paid in cash or taken out a traditional car loan.

But fears are now growing that PCPs are luring millions of drivers into taking on too much debt.

Earlier this month, reports emerged that The Car Finance Company, one of the country’s biggest lenders to people with poor credit histories, may be in difficulty after six of its directors resigned. It is also more than six weeks late filing its accounts.

So rapid has been the growth of PCP finance that the City watchdog is concerned that some customers are being sold complex deals they do not understand. It has launched an investigation.

Graham Hill, a car finance expert at the National Association of Commercial Finance Brokers, says: ‘PCPs can be an appropriate solution for many car owners, but the numbers suggest that there are thousands of people who are taking out these deals when they shouldn’t.

‘And yet they are being pushed heavily by car dealerships and their finance arms.’

Minimum wage: You would need to earn just £13,500 to be able to afford a Mazda MX-5 — a flashy Japanese two-seater sports car that’s worth roughly £19,000


Until a few years ago, most car buyers either saved up or took out a traditional car loan, known as a hire purchase agreement.

But then car finance providers in the U.S. began offering cheaper PCP deals — and British providers followed suit.

PCP agreements typically last for three to five years. To get one of these, you’ll have to pass a credit check.

But unlike when you take out a mortgage, car finance providers don’t usually sift through your bank statements to see whether you can afford the vehicle.

Many providers will offer you finance on a car as long as the monthly payments don’t exceed a quarter of your take-home pay.

That’s how someone earning the minimum wage can afford a top sports car.

However, unlike with a regular loan, you will not own the car outright at the end of the term. This is because you are not borrowing the full value of car. The loan only covers the expected depreciation in the value of the vehicle over the life of your deal.

For example, let’s assume you are buying a £20,000 car on a three-year PCP agreement.

The dealership then predicts the car will be worth £8,000 at the end of the term — a depreciation in value of £12,000. It is this £12,000 that you are borrowing.

Once the agreement ends, you have a number of options.

If you want to keep the car, you’ll have to pay the remaining £8,000, known in industry jargon as the ‘balloon payment’. If you don’t, then you just hand back the keys, walk away and buy another car on a similar deal.

Finally, if the car is worth more at the end of the deal than the dealership predicted, you can choose to put down any extra money you’ve paid as a deposit on a new car.

It is because you are not borrowing the full cost of a new car — as you would with a hire purchase loan — that the monthly payments work out so much cheaper.

Using the example above, if the interest rate on the loan is 4.5 per cent, your monthly payments on a £12,000 PCP agreement work out at £387 a month.

By comparison, you’d have to fork out £595 a month on a standard hire purchase loan for the full £20,000 cost of the car — £208 a month more.

Drivers earning as little as £8,200 a year can walk away with a brand new £12,500 Ford Fiesta, Britain’s most popular car


Despite the obvious attraction of this type of cheaper loan, critics say dealerships and car finance companies are not being transparent about the true costs of PCPs.

While you pay less every month, you can end up paying more in total because of the complicated way these deals are structured.

Using the example above, as you pay down your £12,000 loan, the amount of interest you pay falls, too.

But what you may not know is that your lender also charges you interest on the £8,000 you would have to pay at the end of the deal if you want to own the car outright (the so-called balloon payment).

This interest is factored into your monthly bill and charged even if you have no intention of buying the car in full.

And as you’re not paying down this £8,000 each month, the interest doesn’t shrink either.

This means that you end up paying more interest in total with PCP deals compared with a standard loan.

City watchdog the Financial Conduct Authority has raised concerns that car finance firms could be lending irresponsibly.

It has launched an investigation and will be looking closely at whether firms are being upfront about the true cost of this type of loan. Critics accuse dealers and lenders of pushing drivers towards PCP deals because they are more lucrative for themselves.

Anecdotally, Money Mail has learned that this is because finance companies pay salesmen commission payments that run into thousands of pounds each time a customer signs up.

Others have slammed the steep charges lenders slap drivers with if they don’t stick to the strict terms of their agreement.

For example, with PCP deals you must agree a mileage with your loan provider — typically 10,000 miles a year.

You can choose a higher allowance, but this will cost you more each month.

If you go over your limit, you’ll be hit with a charge of up to 10p for every mile. This means that if you drive an extra 1,000 miles over your agreed limit, you’ll be hit with a £100 bill.

Ford Fiesta

So it’s vital that you choose a mileage you will not exceed and do not feel pressured into accepting a lower figure to cut your costs.

You will also be charged for any damage to the car. Most finance companies allow for normal wear and tear, such as minor scratches to the bodywork or light scuffs on the wheels.

However, if the windscreen is cracked or a wing mirror is missing, you’ll be charged for the repairs.

In this situation, it’s worth checking to see if it’s cheaper to get the car fixed at a reputable garage before returning it to the finance company.

Another major drawback is that there are often hefty fees if you want to end the agreement early.

If you have repaid more than half of the loan, you can walk away without any extra charges and it won’t affect your credit rating — this is your legal right.

But if you have paid less than half you may have to make up the difference.

So if you have only paid £4,000 of a £12,000 loan, you may be asked to hand over £2,000 to get you to the halfway mark.

James Daley, of consumer website Fairer Finance, says: ‘Car finance is often sold aggressively by dealers and the industry is not always regulated as closely as you would like. These firms often use smoke and mirrors to make you think you’re getting a much better deal than you actually are.’


Such is the rapid growth of PCP finance that experts are warning these controversial loans could be fuelling a new debt crisis.

Most major manufacturers, including Ford, Volkswagen and Renault, now have their own finance businesses. Some firms do a detailed affordability check on you before giving you a loan. But others will lend as long as the payments make up no more than a quarter of your salary after tax.

The City watchdog last month warned that finance firms may be acting ‘irresponsibly’ by dishing out credit too freely.

Once the money has been loaned, many car finance firms package up the debt to flog to investors — a chilling echo of the U.S. sub-prime mortgage crisis of 2007.

Last year, finance firms packaged and sold £6.7 billion-worth of car loans — more than double the year before.

In the run-up to the financial crisis, tens of billions of pounds worth of mortgage loans were bundled together into bonds and sold to pension companies, hedge funds and investment firms in a process known as securitisation.

However, while they were marketed as safe — or given an AAA rating — these bonds were filled with risky loans that had been given to borrowers who could barely afford them.

By 2007, many of these borrowers had begun defaulting on their mortgages. This caused the bonds to collapse and triggered a major global recession.

Experts say that while a car finance bubble bursting would not have the same devastating impact on the economy, it could still cause significant damage.

And they say warning signs are already starting to emerge.

In the U.S., the number of drivers making late payments on their loans is rising, according to analysts at investment firm AJ Bell.

However, they are still significantly lower than the levels seen during the financial crisis.

In Britain, around 1.13 per cent of the loans wrapped up in car finance bonds had defaulted in November — up from 0.84 per cent a year earlier.

Experts warn that tens of thousands of people could run into trouble with their car loans when interest rates finally start to rise.

Russ Mould, investment director at AJ Bell, says: ‘It all looks good when interest rates are at rock-bottom lows, but it won’t look so rosy when they start to rise and people will find their finances under pressure.

‘The car finance industry is not the same size as the mortgage market, but nevertheless it could be damaging to the economy if things turn sour.

‘This issue is a sleeper that will make itself known at some point in the future.’

Adrian Dally, head of motor finance at The Finance & Leasing Association, the trade body for car loan providers, downplayed suggestions that a bubble is forming as more motorists take on large debts.

He says: ‘This is a competitive market that is working well in the interests of consumers.’

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