Few of us can buy a car and pay for it in full, especially for a newer vehicle, leaving car finance as the only way to get the car. But worrying statistics show that nearly half of people admit they don’t know how much they’ve borrowed to get their car, and some 90% of them don’t understand the small print of their finance agreement.
Two new studies showed that 47% of people who take out car finance don’t know how much they have borrowed – that’s around 3 million people. Nine out of ten don’t understand the terms of their finance agreement which can include conditions such as excess mileage fees that can result in much higher costs than expected.
Some 90% of new cars are purchased on finance, yet one-third of people have no idea that multiple applications for credit can hurt their credit rating. Also, another 1.4 million used vehicles were purchased with finance in 2017, meaning nearly 6 million people in the UK have a car that is funded via a finance scheme.
Concerns about the amount of debt people are taking on for their cars has led the Financial Conduct Authority (FCA) to order a review of the industry, with issues such as miss-selling and irresponsible lending being top of the list.
For example, people may know they have a restriction on the mileage they can do but don’t know what the limit is. Personal Contract Purchases, or PCPs, account for almost 90% of the finance agreements and allow customers to pay some of the car’s value for up to five years, and then pay a lump sum to keep the car or hand it back.
Many of these contracts have a set mileage of up to 10,000 miles a year or 40,000 miles over the life of the contract. Penalties for going over these limits can be anywhere between 5p – 30p per mile. But, some legal experts are saying that these limits cannot be enforced.
The penalty question
According to the Consumer Credit Act 1974, providing half the payments have been made and the car is handed back in good condition, there should be nothing further to pay. It is known as a Voluntary Termination or VT. There are risks associated with it – including a black mark on your credit record – but means you avoid the mileage levy.
If people choose a lower monthly payment and a larger end payment, by the halfway point, they won’t have paid back half of the value of the car, and the VT section of the Act won’t apply.
Understanding the misunderstanding
Despite these figures, 91% of car owners say they have a good understanding of how car finance works – although 53% of them don’t know what PCP even stands for. One of the companies behind the studies, CarGurus, said that car finance is complicated, and they expected to find some level of misunderstanding among consumers.
But, what they found was a much higher level of misunderstanding than they had expected. The fact that nearly half of the drivers didn’t know how much they had borrowed was very worrying. The company advocate better education and ensuring that people use reputable companies who give them plenty of information and explanations before deciding.
Another car buying website, FairSquare, said their study showed that 89% of motorists don’t fully understand the small print yet 3 in 5 people still signed up, knowing that they don’t understand the consequences.
Strain of the payments
All of this came when RAC research showed that around 10% of motorists are struggling with the repayments on their cars. Half have had to cut back on spending to keep up with the payments, while others have been penalised for handing back keys because they simply cannot make payments. All of this makes the FCA’s review look to be a crucial step forward.
Helping drivers to understand what they are getting themselves into before they take out a PCP is essential and by making sure that they know what is in their car finance agreement.
Do you know what is in your car finance agreement? What do you think needs to change to protect drivers? Let us know in the comments below?