Motoring: How to get stuck on paying for a new car: Richard Feast on the pros and cons of 'personal contract purchases'

Nearly a third of private car buyers are opting for a new method of financing their motoring. The proportion could be as high as half within a couple of years, according to the company that pioneered it, Ford.

The scheme is what most people would call a lease. The Finance & Leasing Association, on the other hand, insists it is a personal contract purchase, or PCP. The difference is crucial because a PCP side- steps VAT on monthly payments.

That helps towards a PCP's affordability. So does its repayment structure, which can put a motorist at the wheel of a new Metro for as little as pounds 25 a week.

Yet the success of PCPs is not because they make cars cheaper. They make them seem more affordable in the short term, and many buyers are interested only in the size of the monthly repayment, not in total costs. Indeed, there is little difference between the total bill a PCP customer would pay and what his or her neighbour would fork out for a similar model bought on hire purchase. A bank or building society loan might even be cheaper. So might some of the low-interest finance promotions from the same car makers.

Mercedes-Benz claims to have been the first with a national PCP (March 1992), though the real kickstart came from Ford. The market leader introduced its Options plan countrywide in June 1992, having tested it regionally for nearly two years.

The timing was good. It was the run-up to the annual August sales peak, and Ford put pounds 2m into the promotion to ensure buyers were aware of Options. Other car makers had to match Ford or be left behind. Vauxhall followed with Choices 1-2-3, Rover with Select, Peugeot with Passport. Now only a handful of smaller companies have no PCP programme.

Even the Midland Bank has joined the rush. Its credit-card holders can shop by phone with Carchoice, organised through the Swan National hire company which Midland bought in 1993.

The various PCPs differ in detail, though their principles are similar. They specify a deposit and fixed-term monthly repayments. The crunch comes at the end of the contract, when the driver has to decide whether to make a final 'balloon' payment to get outright ownership of the car, swap to a new model, or give the car back.

At the time the contract is drawn up, the dealer guarantees the car's minimum value at the end of the agreed period (two or three years), based on the driver's projected annual mileage. The monthly fee is based on the difference between the new and second- hand prices, plus interest charges. The driver does not finance the whole value of the car through monthly payments.

In broad terms, a PCP means monthly repayments of about pounds 100 for a Citroen AX Debut, pounds 150 for a Nissan Micra 1.0L, pounds 185 for a Rover 620i. The size of the deposit varies, but a representative 30 per cent on a Vauxhall Astra comes to just over pounds 3,500 - what a buyer might have spent on a used car.

PCPs make new-car motoring much more accessible, and the big benefit is peace of mind: new cars tend to break down less, and if they do, the maker's warranty takes care of the cost. Some PCPs offer higher levels of after-sales care - at higher premiums, of course. They can embrace regular servicing and even tyre wear.

Looming over the whole deal, however, is that final decision. The Consumers' Association points out that it makes little sense to walk away at the end of the contract 'unless you really only need the use of a car for two or three years'. Few people fall into that category, so the sensible options are to produce the final payment which buys the car, or make a deposit on another new model.

This may be the PCP's flaw. Even in the case of the little Citroen AX, which is about as cheap as cars come these days, that means another pounds 2,500 to secure ownership. To have that sort of money available, the driver must have saved pounds 70 a month over the three years of an agreement while making the monthly payments.

Just what PCP users will do is largely unknown, because the schemes are still so new. However, Ford's early experience suggests 70 per cent of Options buyers will renew the package for a new car.

The Consumers' Association believes that in order to keep buyers in a series of PCP packages, the trick is for the dealer to underestimate the minimum guaranteed future value at the end of the two or three years. When the contract is up, the dealer can then decide that the car's second-hand value is, say, pounds 1,500 more than the original estimate. The buyer will probably be a pushover if the unexpected pounds 1,500 is part of the next deposit.

That is clearly to the advantage of the manufacturer and local dealer. While the Renault Clio is a fine hatchback choice now, a buyer might decide the forthcoming Ford Fiesta or Volkswagen Polo would be a better replacement. If, however, he has a Renault PCP, the temptation to stay with the PCP - and the Renault brand - will be irresistible if the buyer is offered a trade-in windfall. Which is the car maker's dream: a buyer for life.