Refunds for unaffordable credit are usually simple – you get a refund of interest paid and, if you still have the account, only have to repay what you borrowed with no added interest. And your credit record is cleaned.
That is the basis for car finance affordability complaints too. But here there is an extra factor – what happens to the car?
When you make a car finance payment, some of it is interest and the rest goes towards buying the car. This affects car finance refunds in some situations.
In the last two years, the Financial Ombudsman (FOS) has upheld an increasing number of car finance affordability complaints. So there is now a good track record of what FOS decides in various situations. Some of these may surprise you…
This article looks at the various types of cases so you can tell what may happen in your case.
I’ll use the Ombudsman’s term redress for the compensation you may get – that covers all the elements, not just a cash refund but a balance reduction and repairing your credit record.
Important car finance articles
Two articles about car finance affordability complaints:
- Were you sold a car on unaffordable finance? looks at what an affordability complaint is. It is a test about your situation when you bought the car. You can win a car finance affordability complaint if you still have the finance, if it has been repaid in full, if you handed back the car, or if the car was repossessed. You can also win if you made every payment on time!
- How to make a car finance affordability complaint has practical details and a template you can use. It is the same template as for other large loans.
And if you still have the finance, these articles look at your options if you can’t afford to keep paying it:
- Can you manage your current car finance payments? you have to carry on making paying while an affordability complaint goes through, and they often aren’t speedy. So you must decide how you can manage the immediate problem of not being able to pay the finance.
- Voluntarily Terminating your car finance This may not be what you want to do but sometimes you don’t have another practical alternative, so find how it works.
What redress do you get in the four main situations
In all cases
In all the following cases, the Ombudsman normally also says:
- if you are getting a cash refund, then you should be paid 8% simple interest on that amount
- any negative marks on your credit record (missed payments, defaults) should be removed.
A) Car finance repaid
This is the simplest case. Often you will have owned the car at the end of the agreement, but it also includes cases where the car was used in part exchange for another one, sold by you to settle the agreement, or settled by you early eg if you took out a cheaper loan or inherited some money or were given a gift.
The redress here is the same as you would get if another type of loan was found to be unaffordable – you get a refund of interest and charges you paid on the finance. And of course you keep the car!
Here is a typical FOS decision:
As I don’t think Moneybarn ought to have approved the lending, I don’t think it’s fair for it to be able to charge any interest or charges under the agreement. Miss C should therefore only have to pay the original cash price of the car, being £4,999 (of which Miss C paid £700 as an initial payment). Anything Miss C has paid in excess of that amount should be refunded as an overpayment.
And another one:
To settle Ms P’s complaint Oplo should do the following: · Refund any payments Ms P has made in excess of £7,127, representing the original cash price of the car.
B) You handed back the car or the lender repossessed it
This covers several sorts of cases – Voluntarily Termination (VT), Voluntarily Surrender (car handed back but not VTed) and Repossession by the lender. The distinguishing feature is that the customer lost the car and the car finance lender ended up with it.
Very often the customer has paid less than the amount borrowed, so the usual approach of refunding interest won’t help. In this decision, the Ombudsman explains why the standard approach isn’t suitable for these cases. The very large numbers in that example are because the car was a new BMW, but the same principle applies to all cases where the lender ended up with the car.
We usually say that the borrower needs to pay back the credit amount provided and that the lender should refund any interest, fees and charges that the borrower paid… So, in this case, this would mean Mr F paying back the £168,436.00 he was originally lent.
But I don’t think that a refund of the interest fees and charges is appropriate here. The car was taken back relatively soon after the agreement started and a settlement on this basis would mean Mr F paying for the full amount lent for a car he had for a few months, without owning the car at the end.
Instead FOS’s typical decision is:
- you should pay a fair usage charge for each month you had the car;
- you get a cash refund of your deposit plus the monthly payments you paid plus any payments made after you no longer had the car, minus the fair usage charge;
- any balance still owing is cleared.
Here is one decision where the original car finance payments had been £266 a month:
Miss P also appears to have paid about 14 payments under the agreement and post-termination she has been paying in monthly amounts to reduce the arrears. I also need to take account of the fact that Miss P had fair use of the car for about 19 months… I think the simplest way to put things right here is to ask Specialist Motor Finance Limited to refund everything that Miss P has paid towards the agreement (including what she has paid post termination of the agreement), less a deduction for usage which I think can be fairly set here at £175 per month.
There is no way to predict what FOS will set the fair usage charge at. It is usually significantly less than the monthly car finance payment. In this decision the Ombudsman talks about setting the fair usage charge:
I note that Mr W did have use of the car for around four months, so I think it’s fair he pays for that use. But I’m not persuaded that monthly repayments of over £220 a month are a fair reflection of what fair usage would be. This is because a proportion of those repayments went towards repaying interest. There isn’t an exact formula for working out what a fair usage should be. In deciding what’s fair and reasonable I’ve thought about the amount of interest charged on the agreement, Mr W’s likely overall usage of the car and what his costs to stay mobile would likely have been if he didn’t have the car. In doing so, I think a fair amount Mr W should pay is £110 for each month he had use of the car. This means Moneybarn can only ask Mr W to repay a total of £440… Anything Mr W has paid in excess of this amount should be treated as an overpayment.
But the fair usage charge is related to the cost of the car, so if you have paid a large deposit then the fair usage charge may not be any less than the monthly repayment.
C) Car finance still running & you have paid MORE than the amount borrowed
Here the typical redress decision is:
- you should only have to repay what you borrowed, with no interest or other charges added;
- any amounts paid over this should be refunded;
- the balance still owing is cleared and the car is transferred into your name.
One Ombudsman decision in this situation is:
As I don’t think the finance should’ve been approved, I’ve thought about how to put Mr H back in the position he would’ve been in if this hadn’t happened. So I think that Moneybarn should cancel the agreement. But, because Mr H had already paid Moneybarn more than the original amount of the finance, he should be allowed to keep the car. So, Moneybarn should… refund everything Mr H has paid above the original finance amount of £5,590.
Here is another one:
1st Stop Finance [Oplo] have said that Mr D has already paid more than the cash price of the car and Mr D still has the car and has continued to make the payments under the agreement. If that’s the case, I think it’s fair to allow 1st Stop to retain the payments up to the cash value of £13,899 in respect of the fair use Mr D has had from the car. Mr D should be allowed to keep the vehicle and anything he’s paid beyond the cash value should be returned to him.
D) Car finance still running & you have paid LESS than the amount borrowed
This tends to happen early in a car finance agreement. There haven’t been many FOS decisions in this type of case because often the borrower is unable to keep paying so the car has already been VTed, handed back or repossessed.
The typical redress decision is that:
- the lender should take back the car;
- any remaining balance you owe should be cleared;
- you should have a refund of your deposit plus the payments you have made less what a fair usage charge per month would be.
So FOS is making the same decision it would have made if the borrower had voluntarily terminated the car, see (B) above which looks at what this fair usage charge is. Here is one example:
I instruct Oodle Financial Services to put things right by doing the following: · Cancel the agreement with nothing further to pay · Collect the car at a time and date suitable for Mr T at no cost · Reimburse Mr T all repayments made towards the agreement along with any interest, fees or charges. Oodle can retain from this amount £250 a month prorated from when Mr T took the agreement to 8 December 2019.
NB I haven’t seen a case where the borrower was close to having repaid the price of the car, so I don’t know what FOS would decide in a marginal situation. I would argue for the borrower being allowed to make a few more payments and retain the car.
Only (D) is likely to be a problem for borrowers
Cases A, B and C are straightforward. The redress you get from winning these cases will normally considerably improve your situation.
But if you are currently in case D – you haven’t yet repaid what you borrowed – you may have hoped to be able to keep the car and only pay the remainder of the purchase price at an affordable rate. I haven’t yet seen a FOS decision where that is the result.
If you are in this situation now and you really need to keep the car, decide if it’s possible to delay a complaint. This would involve carrying on making the payments until you fall into the case (C) situation.
Ideally you would delay until you have repaid the amount borrowed and are clearly in case C. But it will take several months for a FOS decision to go through, so you could plan on making an affordabilty complaint several months before that point.
Read Can you manage your current car finance payments? which looks at your options. If none of these will work, you may have no better alternative to VTing the car now and making an affordability complaint at the same time.