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23.01.2018

Fears are Rising that Car Finance could Crash

Fears are now growing that one million car finance agreements may cause another financial crash in the UK.

A survey by UK Motorist organisation, the RAC, has found one in ten car owners are now struggling to maintain payments and almost 45% have admitted they are cutting back to afford monthly payments.

It is believed as many as 90% of the new cars being purchased in the UK are now being purchased using Personal Contract Purchase agreements (PCP), with one million being taken out between November 2016-17.

The car finance loans, which are believed to be worth up to £18 billion in the UK, are also now being packaged and sold in the same way mortgages were in the run up to the credit crunch in 2008.

Rachel Reeves, UK economist and Member of Parliament, who chairs the House of Commons Committee on business, energy and industrial strategy, has warned that the agreements could be a ticking time bomb for the UK and has called for the Financial Conduct Authority to tighten up the affordability checks people are subject to before they can take out car finance.

However, the RAC survey, also found that a quarter of drivers don’t always understand the finance options available to them, and 72% don’t shop around.

This problem is also compounded by the fact many don’t understand the complex PCP agreements they are entering and are facing unexpected charges and penalties, even when they try and terminate the agreements legally

What are Personal Contract Purchase (PCP) Agreements?

PCP agreements are essentially hire-purchase agreements, provided for by the Consumer Credit Act 1974, so not totally new.

When someone enters an agreement, they usually put down a deposit and agree to pay a monthly instalment, normally for a period of three to five years. When the agreement comes to an end, they hand back the car or make a final balloon payment to take ownership of the car.

Until that final payment is made, however, ownership of the car remains with the provider, meaning the customer essentially is only renting the vehicle until the final payment is made.

Where PCP agreements differ from traditional hire purchase agreements, however,  is how the monthly instalment is calculated. In the past, the amount was normally based on the value of the car, whereas in PCP agreements, it is based on how much the car depreciates in value over the term of the agreement.  The idea being this protects the finance company from the falling value of the car, so if they do have to re-sell it, they recover the amount outstanding. It also means people pay less than they would under a traditional hire purchase agreement. This has allowed many consumers to buy higher spec vehicles than they would have been able to under traditional hire purchase agreements.

Another feature of these agreements, however, is they often have mileage clauses. These clauses state the monthly instalments only cover a certain amount of mileage over the term of the agreement. When that mileage is exceeded, the companies can charge the driver more, to compensate for the increased depreciation in the value of the car.

Disputed PCP Charges may be Illegal

However, a dispute has now arisen over whether these additional mileage charges are legal in certain circumstances, such as when a driver voluntarily surrenders the car under section 100 of the Consumer Credit Act 1974.

What this section states is providing someone pays at least half of the total amount owed on the PCP car agreement, they can terminate it and don’t need to worry about making any further payments. The exception to this rule is where they have not taken reasonable care of the vehicle. In such situations they may have to pay additional charges to compensate for the additional depreciation in value that has been caused by the unreasonable wear and tear.

The view that finance firms are taking, is that where someone exceeds the allowed mileage in the agreements, this is the equivalent of customers not taking reasonable care of the vehicle and an excess mileage charge can become payable on voluntary termination of the agreement.

This issue recently featured on Radio 4’s BBC Moneybox. It highlighted the experience of one customer who faced a charge of £800 for excess mileage when he legally terminated his agreement. When the client disputed the charge, the finance firm noted two missed payments on his credit reference file, damaging his credit rating.

As yet, there is no definitive answer as to whether such charges are legal or illegal and opinion is divided. However, the issues highlights how, even when customers legally terminate agreements, they can face unexpected charges.

Why it is important to obtain advice

The problem with PCP agreements, is not only are people legally bound to maintain the agreements until at least half the payments are made, but they often depend on the cars the agreements finance to earn a living. Where payments are missed, not only do they default on their agreements, but risk having the cars repossessed, which can result in a loss of income, making a bad situation worse.

One of the advantages of the agreements, however, is the customer doesn’t own the vehicle until it’s paid in full. This means it cannot be sold to pay their other debts when they enter Individual Voluntary Arrangements, or in Scotland, Protected Trust Deeds and Debt Payment Programmes under the Debt Arrangement Scheme. They, however, do have to maintain their monthly instalments under the PCP agreement. This can sometimes be justified in order to allow the consumer to earn a living to pay their other debts.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.