Is Britain facing an EV car finance bombshell? How electric car owners who take out PCP loans risk paying far MORE than vehicle is worth due to collapse of second-hand market

It's the way eight in 10 motorists finance their new car, but are personal contract purchase deals good value for money, especially for people considering buying an electric vehicle (EV)?

In the 12 months to October 2023, around £17 billion was lent by financial institutions to motorists looking for a new car.

Of these, one in five new cars sold in Britain is an electric car. According to the car industry, some of these, such as the Seat Mii Electric, will lose more than half their value within twelve months.

This decline in value is causing concern among financial experts.

Derren Martin, cap hpi's director of valuations, said there are many reasons behind the collapse in electric car prices.

He told This is Money: 'Range anxiety became an issue again after a number of unfavorable reports of two to three hour queues over the Christmas period, particularly at motorway service stations.

'Then there were the costs that had to be charged. With electricity prices rising in recent months and fossil fuels falling, it was no longer clear that it was cheaper to charge your electric car than to refuel your ICE (internal combustion engine) car.

'This all happened at the same time as hugely increased volumes returned to the second-hand market, following registrations that started three years ago.'

At the same time, petrol and diesel cars are much better at retaining their value, raising fears that the price of EV cars will fall further.

Currently, people who buy an electric car can take advantage of salary sacrifice schemes that reduce the amount of tax they pay on the car. While this makes the car more affordable, the government can change the rules without warning.

Such a price drop will impact customers with PCPs as the final settlement amount is based on what the manufacturer expects the car to be worth at the end of the contract.

Of the 651,933 cars sold, an estimated 522,000 were financed through PCP deals. According to industry figures, eight in ten PCP customers do not intend to repay the full loan, but will instead hand in their car at the end of the term and sign a new agreement.

However, according to figures collected by MailOnline, customers could lose thousands of pounds in value by financing their vehicles using PCPs.

Comparing one deal to another is also very complicated due to the confusing way many offers are structured.

In the second-hand market, more and more people are signing up for PCP deals as the lower monthly payments allow the motorist to drive a more expensive car than they would normally be able to afford.

But all financial products come with significant risks.

Under the terms of a PCP deal, the customer pays a deposit, normally around 10 percent of the vehicle's list price. The remaining amount is financed between two and five years, with the customer paying a fixed monthly amount.

However, unlike a traditional bank loan or hire purchase agreement, the customer only pays part of the remaining debt.

At the start of the agreement, the manufacturer will agree to offer a minimum value for the car at the end of the agreement. If the car depreciates less than this minimum value, the customer will have more equity when they sign up for a new deal, or pay less to settle the balloon amount.

What happens at the end of a PCP deal?

• The customer can hand in the keys to the car and walk away
• The customer can return the keys and sign up for a new PCP deal
• The customer can pay the balloon payment and own the car outright

What can go wrong?

• The customer fails to keep up with payments and the car is seized
• The car is damaged or stolen, causing the customer to suffer a significant loss
• The customer drives more than the agreed number of kilometers during the deal

Why do people sign up for a PCP deal?

• It offers customers a lower monthly payment compared to traditional financing
• The lower compensation allows them to drive a 'better' car
• It also allows them to buy the latest cars every few years

In one deal researched by MailOnline, the Audi e-tron, 95 kWh 55 Quattro S-Line Sportback has a list price of £61,755. A customer who signed up for a two-year PCP deal had to pay a deposit of £11,951 on the vehicle, although Audi also contributed a further £5,000.

The customer will pay £697.01 per month for the next two years, although service, insurance and other costs are extra. At the end of the term, the customer can walk away or pay the balloon payment of £34,021.

At this stage the customer has spent £30,992 on the car. However, this customer could save £1,222 by instead of paying the balloon payment, buying a second-hand version of the same car with the same specification, mileage and age.

With a Mercedes EQC 500 300 kW AMG Line Premium Plus 80k 5dr Auto, the savings can be up to € 1,956.

Someone who signs up for a three-year contract on a £79,995 Jaguar I-Pace will pay a deposit of £10,999.50 along with £1,032.70 over the life of the contract – a total of £47,122.

However, a three-year-old I-Pace is currently valued at around £25,799, meaning the £32,873 balloon payment makes no financial sense as the owner would have negative equity of more than £7,000.

Although someone who opted for a £38,970 Skoda Enyaq on a three-year deal would only have to pay £18,482, while a second-hand version would cost them £25,499.

For a Volkswagen ID.3 on a two-year contract, the customer faces a huge payment of £17,333, compared to the second-hand value of £21,299.

Someone who signed up to buy a new Tesla Model 3 from £49,990 on a two-year contract paid a deposit of £11,600 and monthly payments of £766.

The £25,995 balloon payment looks like a bargain compared to the price of the two-year-old equivalent, which is estimated to cost £29,999.

However, over that two-year period, Tesla charged interest at 9.5 percent APR, meaning the £49,990 car cost a total of £55,979 – or almost 11 percent more than list.

Of the seven potential deals MailOnline examined, Mercedes, Jaguar and Skoda offered zero percent financing on their cars.

Volkswagen and Audi charged between 4.9 and 6.9 percent interest, although they also paid a deposit of £3,000 and £5,000, mitigating some of these costs.

Lexus charged 5.9 percent, increasing the cost of their car from £36,970 to £40,194.