MORE than a decade ago most cars in the UK were bought on hire purchase (HP).

HP is a simple arrangement that's easily understood. You pay a modest deposit.

You make monthly payments towards interest and the cost of the car. With the final monthly payment, you own the vehicle.

Things started to change in motor finance from 2010 with a rise in personal contract purchase (PCP) agreements.

By 2020, 90% of all new cars were bought on credit - with PCP accounting for 80% of the UK's consumer car finance market.

PCP looks attractive - but looks can be deceiving. It's used for the purchase of new or nearly new cars and is a form or hire purchase or conditional sale.

Like HP, you pay a deposit and make monthly payments, but PCP is a different creature all together.

You have the option of returning the car at the end of the PCP agreement or paying the guaranteed resale value and owning it or using any resale value towards buying a new car under another PCP.

The final PCP payment is known as a "balloon" payment which is usually many thousands of pounds.

This is because your monthly payments have been artificially low.

You haven't been paying off the capital cost of the new car as you would with HP. Essentially, you've been paying interest plus a sum towards depreciation as new cars lose value quicker than a rat up a drainpipe.

All of which enables PCPs to look like great value for your monthly budget, while concealing expensive interest rates - and glossing over the fact you own nothing unless you can make the balloon payment.

In 2019, the Financial Conduct Authority (FCA) found that a typical PCP agreement overcharged consumers by £1100 in higher interest rates - with an overall cost of £300 million per annum.

Car dealerships and finance houses had colluded to increase the size of dealer commissions by linking them to higher interest rates. Earlier this year the FCA banned this type of commission and also required greater disclosure and transparency on commissions generally.

Worryingly before the Covid-19 pandemic, research by Drover in 2018 found that 28% of motorists felt trapped as most could never afford the final PCP balloon payment. They felt obliged to take out another PCP. Unsurprisingly, 80% of all motorists do this in practice.

With the prospect of more and more people facing a drop in household income because of the pandemic, it's important to be alert to the financial pitfalls of PCP and be aware of your rights.

Section 100 of the 1974 Consumer Credit Act (CCA) entitles a creditor in a PCP to 50% of the total amount payable under the contract (including interest and charges) in the event of early termination or default.

Let's say you bought a car on a PCP over four years for £24,000. You would need to make 47 instalments of £340 per month with a balloon payment of £8,000 at the end if you wanted to own the car.

You lose your job after making 12 payments. To hand back the car you'd have to pay £7,920 to hit the 50% figure. Assuming you could, you'd end up having paid £12,000 to have a car for one year. You would own nothing.

If your income drops and you're struggling to make PCP payments contact your lender and explain your circumstances. The FCA requires creditors to offer forbearance to vulnerable customers in financial difficulty. This may mean offering a holiday period or reduced payments to enable you to get back on your feet.

If your lender refuses to do so you can lodge a complaint with your lender and ultimately pursue a complaint with the Financial Ombudsman Service. Govan Law Centre is launching a new online Debt Navigator service next month to help people across Scotland with these types of problems.

Before a creditor can repossess your car, they need to serve a default notice.

At this stage you can apply to the court for a "time order" under section 129 of the CCA. The benefit of doing so is you can keep your car and make payments to your PCP debt.

The CCA empowers the court to reschedule arrears and future instalments. Section 136 of the CCA empowers the court to reduce interest rates in certain circumstances.

You can seek a section 129 time order from when you've received a default notice or even after decree has passed without you responding to court proceedings.

Speak to a free money advisor as soon as possible to protect your legal position. From the caselaw, any payment proposal has to be affordable and reasonable.