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.
Understanding finance
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.
FCA review
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?
Never on this planet will anything sold to the masses be sold fairly and in the interest and benefit of the customers
I think that the problem is the high % rate charged with car loans at a time when it’s quite cheap to borrow. And because of the other ‘benefits’ you are persuaded to go for an affordable monthly repayment without thinking of the % charged. Clear regulations would be good.
No add-ons would be better. you don’t buy trousers then pay more for the extra leg
“no the car does not come with a spare wheel and if you want a steering wheel, that is an optional extra”
No the car i was buying didn’t have a spare but a puncture kit, so I got them to swap them, didn’t cost them or me anything and they sold a car
Friend of mine was killed when a tyre ‘repaired’ with an aerosol puncture kit exploded in his face when he used an acetylene torch to try and free corroded wheel nuts. Make sure you get a real spare tyre.
Never understood the mileage charge on a finance for a car, how would they know? if you moved home and didn’t use the garage that sold the vehicle for servicing and repair, How do they know.
when you hand it back they look at the mileometer, derrrrr
Derrrrr If you are buying it, why would you hand it back, surely if you can’t afford it, why would you buy it in the first place.
Geoff, I think you’ve just highlighted the whole jist of this article, i.e. that car finance is so poorly understood. The excess mileage charge only applies if you hand the car back (with “excess” miles and hence lower residual value than expected). If you buy the car outright at the end, then there’s no rationale for paying an excess charge to anyone – the financiers have no more interest in the car and have received all the payments so aren’t out of pocket; you now have a higher mileage car, so in theory you could pay the excess mileage charge to yourself. And as for why hand it back and why “buy” it in the first place, you don’t buy it in the first place – it’s more akin to renting the car for the entire period, with a right-to-buy at the end.
Hi Matt thanks for that, a more sensable answer than the first, so if I’m reading you right, if you buy a car on finance its like a lease or renting, you aren’t the owner until its paid for and giving it back for whatever reason the mileage charge is like a charge for over using it, which doesn’t matter if you are keeping it. Having not financed a car purchase since the late 60’s I was a little lost in the subject. cheers mate for the enlightenment.
Has anyone thought of buying a car on credit cards, then apply for a new ones with 18 months interest free on balances transferred, then when the 18 months is nearly up do it again and again until its paid off. No interest payments.
you usually get charged up to 3% extra for using credit cards to buy anything.
Not if you get up out of the chair and say no and walk, they need the sales especially now, I bought the car 2 years ago like that, no 2, 3 or 4% add-on
I believe that this is now illegal, but the seller doesn’t have to accept your card.
Since last 13 January fees for paying on a personal credit or debit card have been outlawed
When I bought a new car many years ago on a card, the dealer insisted on a debit card. I had to make sure that I had the cash in my account.
Any ideas on this story?
What if you are told to buy the car in your name, as your son has a bad credit rating, then when the V5 comes through transfer in to your son’s name. “Wouldn’t that make a difference when the car is returned?” I asked. “No, no difference at all, pretend the car is yours” was the reply from the salesman. So I entered into a PCP over three years even though I am retired, have no income and he was that desperate for the sale he said himself that he shouldn’t be doing this??
Name on the V5 doesnt necessarily mean you are the owner of the car, just responsible for it. Wherever there is a credit agreement in place the car belongs to the credit company until it is paid for in full!
They are out to make money – if it looks too good to be true, it is.
I bought a car with transmission fault but have to wait 8 weeks for decisions who’s responsible meaning I go over my 30 day hand back ?
Its not as cut and dried as it used to be, but If you reported the fault within the 30 days and stopped using the vehicle, i would say this counts for a full refund, especially if they can’t prove the fault wasn’t there when you bought it.
even if you hadnt contacted them within the first 30 days, upto 6 months if they can’t prove it wasnt there when you bought it, you’re entitled to ask for a repair or replacement free of charge.
if they can’t repair or replace, you are entitled to a refund, but they can deduct a bit for fair use, but if it took them 8 weeks to diagnose, then you cant have had it long.
Jesus threw the money changers out of the temple for a reason. Take a leaf from the Quran instead of the Torah and don’t use credit. Save up and buy. The use of credit has skewed the actual prices of cars and homes well beyond their real value. If 100s of 1000s of £££ were not borrowed at extortionate interest rates with mortgages (French for death loan because that’s when you’ll finish paying it) homes and cars would be many orders of magnitude cheaper and your lives would be easier and more enjoyable as you would have a much greater disposable income.
If you can’t afford it, you don’t buy it, simple. I have a 2002 mondeo, passes its MOT every year. The road tax I pay costs me more than the value of the car but why should I change just to keep up with the Joneses? I have a reliable car and I look after her and she looks after me (touch wood).
Nice information on different topics have been given such as understanding finance and strain of payments etc.This information is worth appreciation.