The FCA has published its long-awaited review of car finance: Our work on motor finance – final findings. This work began back in April 2017.
News reporting has seized on the FCA’s findings that commission structures give dealers an incentive to charge higher interest rates. For example: Car buyers overcharged £1,000 by dealers for loans, says watchdog.
But here I am interested in the FCA’s findings on affordability where the report concluded:
Contents
What is meant by “affordable”?
You might think that making all your car finance payments on time shows it is “affordable”.
But the FCA, who regulates the firms that provide car finance, has a different definition.
A loan is only affordable if you can make the repayments on time, without hardship and still meeting your other commitments. That means you need to be able to pay all your other debts, your normal household bills and expenses as well as the new car loan payments.
If you have money problems, you may have made your car finance a top priority as you don’t want the car to be repossessed. As a result, your credit card balances may be increasing, you may have taken out loans and you may have got behind with bills.
In this case, even though your car loan is up to date, it is not “affordable”.
Affordability checks before you take the loan
A lender has to check that you can afford the car finance. This may mean checking not just your credit record, but also your income and expenses as well.
These checks have to be “proportionate”. If you have got a great credit record and a good income and are only borrowing a small amount, the lender isn’t going to have to look in great detail to be confident you can afford it.
But with a poor credit record, or where the repayments will be a large proportion of your income, better checks are needed. The FCA rules don’t say exactly what has to be done, but a lender often can’t rely on what the customer says their income and expenses are. Other ways to check include:
- your credit record shows what you are paying to other debts each month;
- there are national average figures for some expenses, so your estimate that you spend £60 a month on food or nothing on clothes isn’t realistic;
- the lender could look at payslips or bank statements to be sure.
Should you make an affordabilty complaint?
The car finance company may have done a good assessment of affordability. At the start, you were able to manage the loan repayments. Then something went – perhaps you had your hours cut, or you split up with your partner. Here it’s not the lender’s fault that the car finance is now unaffordable.
But you may think that the lender should have seen that the loan was too expensive if they had looked properly at your situation.
In this case, you can make an affordability complaint to the lender. You should ask for:
- a refund of the interest on the finance. If you are still repaying the loan, what happens is that the interest is removed from the balance, so you only repay what you borrowed;
- for the remaining balance to be repaid at an affordable rate; and
- for any negative marks to be removed from your credit record.
The affordability rules for car finance are the same as for other loans. So you can follow the approach and use the template letter for an affordability complaint in this article: How to ask for a refund from large, bad credit loans.
Few affordability complaints have been made about car finance, so there is no indication of what the success rate is likely to be for these complaints. You should expect the lender to reject it and have to send it to the Financial Ombudsman – the process is all described in the above link.
These complaints may take many months. You will have to keep up the loan repayments during this time, or your car may be repossessed. I suggest you take some debt advice – talk to National Debtline who can help you look at your options for getting through this period.
Two alternatives to making an affordability complaint
1. Terminate your contract and hand back the car
HP and PCP contracts give you the right to terminate them, hand back the car and not owe any more money if you have paid over half the total contract value. This is often called VTing a car – that stands for Voluntary Termination.
Read How to VT your car which explains how terminating an HP or PCP car finance contract works and what you need to do.
When terminating your contract will give you a good result, it may be quicker, more certain and save you more money than making an affordability complaint.
If you don’t need to keep the car, you should definitely consider terminating the contract;
If you need a car bu,t after taking debt advice, you can’t see how you can manage the repayments you may have no better alternative than termination.
2. Apply to the court for a Time Order
National Debtline has a good factsheet on Time Orders. It says:
You may be able to use a time order to reschedule the payments on your agreement. A time order and an order to change the interest rate may be a good option if you have fallen behind with your payments. You may be able to stop the creditor repossessing your goods.
The factsheet mentions the Unfair Relationship test. If the lender did not make adequate affordability checks, that can be seen as resulting in an Unfair Relationship so you could include points about this in your application.
You can apply for a time order if you have been sent an arrears notice, a default notice or the lender has already started repossession proceedings. You can’t apply if you currently up to date with payments.
I am not suggesting that a Time Order is an easy option. You have to start a court case and you may well have to argue it before a district judge who has never seen an application for a Time Order before as they are unusual. If you lose, extra costs may be added to your debt.
One of the reasons the Financial Ombudsman was set up was to provide a more informal way of resolving complaints than going to court.
National Debtline suggests that you may want to take advice from a local advice agency if you want to go for a Time Order, for example a Law Centre or a Citizens Advice. The Legal Beagle forum also provides moral support for people with court cases.
Choosing between these options
It can be complicated to decide between making an affordability complaint, VTing the car and applying for a Time Order.
Sometimes one or more of the options can simply be ruled out:
- you can’t VT the car if you have been served with a Default Notice which has expired;
- you can’t apply for a Time Order if you are up to date with payments;
- if the finance was originally affordable but your circumstances have changed, an affordability complaint will not succeed;
- when you want to keep the car, VTing it is not a good option unless you have no other alternative.
The rest of your finances matter as well. Car finance payments are a priority debt, so setting up a debt management plan for your other debts may help.
Talk to National Debtline about your car finance and the rest of your situation. They will help you decide what to do.
Get interest refunded from large loans
Which debts are top priority?
How to end your car finance early
Darren stone says
Hi. I’m after some advice regarding this.
I stupidly took a car out on finance with moneybarn, my credit was poor at the time so this was all that was accepted.
The car was worth around £8000 but the credit total was around £18000. I have paid around 27 months so far with a struggle on a 5 year payment plan. I don’t want to terminate and lose the car as I feel I have already paid so much into it.
Is there anything I can do? Or do I just need to continue to pay it all off.
Any advice would be hugely appreciated.
Sara (Debt Camel) says
This is HP or PCP? What do you think the car is worth at the moment? Is your credit now better? How much of a struggle are the repayments at the moment?
Darren stone says
It is HP. which is why I don’t want to cancel the whole thing. As I do not have the money to get a good reliable car outright.
I would say the car is now worth around £5500. My credit is now a lot better yes. And in terms of struggling I have had to put off my rent in order to pay the car finance this month. So I am literally on the edge of affordability at the moment.
Sara (Debt Camel) says
I think you should talk through your whole situation with National Debtline asap. Getting behind with the rent is huge big warning flag. Unless there was something very odd about this last month, if you are struggling that much you may not get to the end of this HP contract however much you want to.
A couple of other points:
1) you need to forget what you have already paid to this car and just decide what is best to do from here on. I know that’s easy for me to say and it’s harder when you have been struggling to make the payments, but making the right decision now depends on your current situation and what may happen in the future, not what has happened in the past.
2) it sounds as though you can VT it in 3 months time. If at that point you still have a good credit record, you may be able to get another car on HP at a cheaper rate?
3) do you have a case for saying moneybarn didn’t do proper affordability checks at the start? If you can show they should have known you would struggle, getting interest removed from the finance would be a huge help. But was the finance really unaffordable for you at the start?
Chris says
Darren,
Just a reality check for you but you don’t have any money in the car. Even though you have been paying it for a while, it is worth a lot less than is outstanding. Just think of it as renting it. Remember that you can VT a car when you have paid half the amount back including interest and DEPOSIT. If you call them they have to tell you your position regarding VTing or exactly how much you have paid so far. This might be sent by letter.
I’d also advise doing a soft credit check(many websites have this) which may give you the chance of starting afresh at a better rate and cheaper payments.
Richard Pearson says
Interesting one this. My son took out a finance deal with Volkswagen Finance. He was also sold a gap insurance and a lifeshine package which consisted of autoglym. After a year it became obvious he was struggling as he is a pizza delivery driver/shop worker. I had to take on the finance and I calculate we will end up paying about £1800 in interest over the 3 year term. The Lifeshine package which was about £250 and the gap insurance at £300 were added to the loan. I gave him the deposit. When the contract is over, there is another £4200 to find to keep the car. The cambelt needs changing which he could not afford the cost of that with the dealer is around £700. Is there a case here?
Sara (Debt Camel) says
The question is, should VF have known that the monthly repayments – including any extras bundled into the finance package – would be too expensive for him?
One thing you could do is send VF a SAR (see the first letter in https://debtcamel.co.uk/refunds-large-high-cost-loans/ which says what to ask for) and see what comes back. Also get hold of your son’s bank statements for the three months before the finance application and see what his actual expenses were.
That will give you more information about whether VF should have been able to see that the loan was unaffordable.
Chris says
Richard,
I have to ask the question but as his father, when you gave him the money for the deposit, did you go with your son to the dealer at any time or did you talk about the finance and what it would cost? Did the conversation about affording the car take place and could your son have bought a cheaper car?
The final payment of £4200 which you mentioned is optional, so your son can just hand the car back at the end of the agreement if he wants, as long as he has stuck to the agreed mileage. The fact that he had the paint protection as well means that the car will hopefully be in a good condition and there is a good chance of the car bring worth more than £4200 at the end, which means he could always sell it to the dealer and walk away with some money in his pocket.
I guess that if your son hadn’t taken out the PCP and just taken out a normal hire purchase agreement over the same term(length of time) it would have cost another £100-£160 a month so the PCP was the best option, other than your son buying a cheaper car?
Richard Pearson says
Hi Chris, thank you for your response. I originally took him there but did not get involved in any discussions with the salesman about what was tacked on. I note that the paintwork has damage on the bumper so am wondering if the lifeshine package will cover this. Apparently, it must have happened when he was parked. A conversation about affordability never took place with the salesman. He said the salesman just kept looking for things to add on and was quite persistent. The mileage is going to be about 5k over when the contract is up in July, so I there will be another £500 to pay if the car is returned. I have been making the payments on his behalf and paying the servicing costs/MOT. He is earning more now than he was at the time of the deal. Of the monthly payment of £129, over £50 a month is interest. It is hard to answer if he could have afforded a cheaper car, the deposit I paid was the maximum I was able to give him, it was money from my Mum’s estate. The car he decided on was one of the cheaprest available at the dealership and he picked Volkswagen as he needed something reliable to get him to work.
Chris says
Richard, thanks.
I’m looking at this from a dealership point of view but trying to be impartial. I’m sure a conversation would have taken place where the salesman would have asked about budget, it’s part of our qualification to make sure we don’t show a customer a car completely outside of their budget. That’s wasting both the salesman and customers time and we wouldn’t do that. To be fair £129 a month sounds quite low per month for a VW unless the deposit put down was a lot which would have kept the payments low.
The lifeshine is a resin polish designed to look after the cleaning condition of the car. To make it shinier without needing to polish. It would also protect it against bird droppings and tree sap for a longer period of time than without it. It’s not an insurance to cover damage. Some dealers sell Smart insurance for that purpose.
I suggest looking at the finance agreement again as the interest you say is being paid, £50 a month on a £79 a month loan is extremely high. VW PCP is branded as Solutions and they do have a limit to what the rate can be. Also. You mentioned paying for the services, but historically VWFS normally include a free number of services if you take out a Solutions agreement. Maybe worth looking at.
Chris says
Re the cambelt, you could always go to a specialist if the main dealer is too expensive. Bear in mind the cambelt is recommended to be changed, not essential, but if something was to go wrong with it the warranty would check that it had been done or not which could affect any warranty payment.
There has to be some responsibility from your son on agreeing the deal who probably thought he could afford it at the time. You say he is earning more now so hopefully he can take back responsibility from you.
Final point, if he sells the car to the dealer or part exchanges, he won’t be liable for the excess mileage, he’ll just get less than forecast as the mileage is over, but 5000 miles on a four or five year old car isn’t a huge price adjustment.
Sara (Debt Camel) says
“There has to be some responsibility from your son on agreeing the deal who probably thought he could afford it at the time.” The Financial Ombudsman takes the view that the bigger responsibility is on the part of the lender to make sure the finance is affordable… asking for a SAR will provide some evidence about what checks (if any) were made before the finance was agreed.
Richard Pearson says
Thanks Chris. I will look into the points you have raised. He brought me the finance agreement today. I think I gave him about 2k as a deposit about 2 and a half years ago. It became apparent about a year into the agreement that he could not afford it. His Mums boyfriend wants him to move out but he cant afford to rent so is a bit stuck at the moment. I will do a SAR and take it from there.
stephen patterson says
I currently have a complaint with FOS regarding the car finance company.I complained to the company regarding affordability and they looked at my complaint and came to a decision within 2 hours.
They told FOS they checked my credit file and bank statements and decided i could afford it but FOS asked me for a copy of my bank statements and over the 3 months statements sent to FOS i had gambled over £4000 to an online casino and was in arrears with a lot of debts including rent and utilities.
When i bought the car in the January it has many faults and i complained and complained it wasnt until the december the finance company sent a guy to look at my car and he found the faults i had mentioned but said they could of been done yesterday theres no way of knowing when they happened even though i had been complaining about them for nearly 12 months.
In the end the finance was too much for me to afford and they took the car off me i had paid nearly £3000 off the car and my current balance is over £5000 remaining.
After i lost my car the company i bought the car from Fowlers Finance was on bbc watchdog program laughing at people like myself buying car from them saying they buy at auction cheap and just sell them straight away.I am sure that is wrong but i will just have to wait for FOS to make a decision.
It is currently at the investigator stage and he says a decison should be made by end of this week.
Sara (Debt Camel) says
Have you sent FF a Subject Access request asking for a copy of all your personal information, including all credit checks they made on you? Something in there may help your case with FOS.
steve says
No i havn’t.All i know is i rang about an insignia and ended up with a citroen c4 piccasso i gave details over phone rang me back after 10mins said everything ok bring some id with you and can have car .that was it regarding checks.It been with FOS a while and in final stages sorry its not with investigator its with an adjudicator
Sara (Debt Camel) says
ok well read https://debtcamel.co.uk/refunds-large-high-cost-loans/ and send off a request for your personal information now. better late than never! if the adjudicator upholds your complaint, great. If it is turned down, you can ask for it to go to an Ombudsman (ignore the adjudicator saying that the ombudsman will reach the same decision – they always say that) and that will takes weeks or months, so you will have the copy of your personal data before then.
Also read a lot of the comments on that page – that will give you an idea of how to frame a good affordability complaint.
steve says
ok i will thanks Sara.
Actually one other thing i had a log book loan out at same time to loans to go for my other car my wife used and FOS upheld my complaint due to affordability and L2G had to give me money back and it was at exact time too with same bank statements so hopefully i may get a result will just have to wait and see
Alex says
Hello there
I took HP out though The Car Finance company in 2016 and at the time provided credit reports, wage slips and bank statements which at the time would have show the HP was unaffordable.
Because I had poor credit, the car was fitted with a black box which would disable the engine if payments were not made.
I continued to make the payments however, I had a lot of issues with the actual car and the black box. Even though I was making the payments, the black box continued to disable to engine. This device was refitted several times as there was issues with it.
In the end, because of all the issues with the car, I gave the car back voluntarily, without penalty or so I had thought.
Fast forward to last month and I received a batch of letters from the Car Finance Company with a default notice attached dated in 2017. All of these letters had been previously sent to a wrong address, which Car Finance Company apologised for in their cover letter.
I contacted them and they are saying that I owe over £5000 as the car was repossessed! I have put in a complaint to the company and put in a Subject Access Request and have said that if need be, I will take them down the unaffordable lending route if my complaint does not go in my favour.
This has made me feel so ill as I have recently paid off all of my debts and I just feel I have taken a massive step backwards.
I don’t even have the car and haven’t done since early 2017 :(
Sara (Debt Camel) says
That must have come as a big shock. It sounds as though you have taken some sensible steps. There isn’t much you can do now except wait until you get the SAR data and a response to your complaint. If your complaint is upheld, you also need to ask for your credit record to be cleared – it was not your fault you never had the letters earlier.
Karli says
I need some advice for my mum about a leasehire car she has signed for. From October 2017 she nursed her husband through cancer until he passed away in February 2018. This was a reallystressful and sad time for mother. Fast forward a few weeks and mum took her 2015 plate car for a service. She bought a new car. Well she thought she had. She thought she had bought a newer (2017) car on HP at 0% interest, and that annual services were included as part of the deal. Now a year later when the car is due for it’s first service she has dicovered that not only is she paying interest on the loan, services are NOT incuded and worse of all she does not even own the car as it a lease hire not a hire purchase. I know the garage do not care about her personal circumstances when she signed the paperwork, but my mum is not a stupid woman. She never buys anything unless it is 0% interest. She is 63 years old. She thought that by the time she retires she would own the car outright. This is not the case, as she will never own the car unless she takes out a loan and pays a huge final payment at the end of the lease. Alternatively, after she has paid at least 50% of the value of the car she can return it and cancel the agreement. Is there anything we can do? My mum is mortified that she has been so silly, and I’m really angry that she has been taken advantage of. Any advice or help would be appreciated. Many thanks
Sara (Debt Camel) says
The interest rate should have been clear on the paperwork she signed. What is it?
I think you will find it hard to argue that the garage misled her about this. She can presumably afford the monthly payments?
What happened to her old car – there should have been a large PX value if it was only two years old?
“Alternatively, after she has paid at least 50% of the value of the car she can return it and cancel the agreement.” so this is a PCP contract. a form of HP, not a lease.