The latest Financial Ombudsman’s Annual Report shows that car finance loans have become the third most complained about matter. Following payday loans and PPI, car finance complaints have increased by a staggering 64% in the last year, leading experts to admit that this could be the next mis-selling scandal.

Could car loans be the next mis-selling scandal?

What are personal contract purchases?

A personal contract purchase (PCP) is a type of car loan offered by forecourt salesmen working on commission. It involves minimal credit checks in order to ensure people that can afford it. PCP loans often allow people to drive away in a new car despite paying a deposit as low as a few hundred pounds.

Loans are sometimes offered that are worth more than the individual’s salary and hire car agreements now account for 90% of car sales across the UK. Watchdogs are set to probe these ‘irresponsible’ loans, as there are concerns that salesmen aren’t using an affordability test to ensure that people can afford the loans.

Increasing complaints

The concerns are highlighted by the 64% increase in complaints to the Financial Ombudsman about such loans. The increase comes as figures show that the UK spent over £3.5 billion on car loan deals in March alone, an increase of 13% on the same period last year.

Complaints about hire purchase policies rose to 5,029 complaints in 2016-17, the majority of which were concerning car purchases. This is an increase from 3,072 in the previous year’s report, according to the FOS. And looking back two years, the increase is even higher, 73% from a figure of just 1,784.

Complaints about this type of finance were the third most complained about topic after payday loans and PPI. Payday loans received 10,529 complaints in the year, another large increase from 3,216 the previous year. Nearly 60% of the claims were upheld by the Ombudsman in favour of the individual.

Payday loan lenders have seen an increase in rules applying to their practices in recent years, including limits on how many times they can ‘roll over’ a loan and how much interest they can charge. These rules have aimed to stop spiralling debt.

In total, the Financial Ombudsman received 25,984 complaints in 2016-17, an increase from 13,713 on the previous period. Complaints were on a wide range of topics including catalogue shopping, credit reference agencies and guarantor and logbook loans (where another person or a vehicle is used as security).

Regulation inspection

The Financial Conduct Authority (FCA) has recently said that it plans to look into the high-cost credit sector, including overdrafts and high-cost products. Its measures have already placed a price cap on the payday loan sector, which came into force in January 2015 and will be reviewed this year.

The FCA next plans to look at high-cost products to see if they are being used correctly or if they are detrimental to the customer. Overdrafts in particular can have poor price transparency and charging levels, particularly un-arranged overdrafts.

As more people complain about car loans, there is little doubt that the FCA will expand its investigation to encompass this area. What it will find and how it will approach the matter will have a big impact on how people acquire car financing in the future.


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