Different ways of financing your car purchase and complaining about it!
Rob Sams is a contributor to Legal Beagles, a forum for people who require assistance or an understanding of their legal rights. He particularly answers questions on the Consumer Rights Act as well as queries on voluntary termination rights under car finance agreements. He has kindly agreed to produce this post on different ways of financing a car and what to do if it all goes wrong!
Financing your car
Over the last few years, reports have shown that a large proportion of cars are mainly financed as opposed to buying outright. With a number of finance options available depending on the buyer’s needs, this article provides a short explanation of the various finance deals as well as your rights if something goes wrong.
What options are available for financing your car purchase?
Hire Purchase: a HP agreement is a type of agreement which the car is hired to you over a fixed period of time. At the end of that fixed period you have the option to purchase the car (though you are not under an obligation to do so) or return it back to the lender.
Conditional sale: a conditional sale is almost identical to a hire purchase agreement except for one difference. under a hire purchase, you have the option to purchase the car at the end of the agreement whereas a conditional sale obliges you to purchase the car and make the final payment.
Personal contract purchase (PCP): similar to conditional sale and hire purchase agreements, PCP agreements tend to have lower monthly instalments because they only cover the depreciation over the term of the agreement, leaving a much larger balloon payment at the end. PCP agreements are becoming increasingly popular with consumers.
Personal Contract Hire (PCH): a PCH agreement is essentially a hire agreement over a long period of time, returning it at the end of the agreed term. One thing to note is that there are strict limits on the mileage you can do, and if you go over, you may get stung. Be sure you estimate your annual mileage correctly but as a guide, the average number of miles is around 10-12k per year.
Fixed Sum Loan: Fixed sum loan agreements are simply personal loans that you would usually obtain from your bank however the loan can only be used for the purchase of the car. Ownership of the car will immediately pass to you on entering into the agreement and you repay the monthly instalments in accordance with the terms. Some finance companies such as Santander and FCA Automotive Services (a subsidiary of Fiat who offer loans) offer fixed sum loan of agreements.
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How to complain if there is a problem with your financed car
Contrary to popular belief, whenever something is wrong with your car, it is not the responsibility of the dealership but the lender because there are two transactions that take place. First, the lender will purchase the car from the dealership and second, the lender will then enter into an agreement with you to hire or purchase the car. Whilst it may seem practical to approach the dealership first, they are not under any obligation to repair the car on your request, though there is no harm in speaking to the dealer first.
If you notice a fault, defect or the car was not described then you may have certain rights against the lender under the Consumer Rights Act 2015 (CRA).
The lender must ensure that the car is of:
Satisfactory quality: the lender is obliged to make sure that the car is in a roadworthy condition at the time of entering into the agreement and is
Fit for purpose: If you made it known to the dealer that you wanted to use the car for a specific purpose or that it must be able to do specific things, and the dealer confirms that it is suitable for those needs, but subsequently turns out to be false, the car would not be fit for its intended purpose.
Wherever possible it is always best to get things in writing so that you create a paper trail of what has been discussed in the event you need to escalate the matter. It may also be helpful to bring another person with you who can back up your story at a later date.
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How to complain to your finance lender about your car
If you haven’t been able to resolve the matter informally, then your next step is to write a formal complaint to the lender, setting out the problems you have experienced, why it is still not resolved and what needs to be done to resolve the issue. There are several options you have under the CRA:
Short term rejection: If the car is faulty within the first 30 days then you have the right to reject the car and immediately terminate the agreement, although you need to prove that the fault existed on the first day. This can be done by obtaining an independent report confirming the faults. Where you exercise the short-term rejection, the agreement is terminated and you are entitled to the total sums paid to date.
Repair or replace: You may choose the option of having the car repaired or replaced, but if one is disproportionate to the other then the lender can opt for the alternative. The lender must repair or replace within a reasonable time without causing significant inconvenience as well as covering any costs incurred.
Final right to reject: This remedy is only available after 30 days if the repair or replacement fails to resolve the issue or it was not carried out within a reasonable time. The difference between this option and the short-term rejection is that the lender can deduct a sum of costs for usage where the final right to reject is exercised. An alternative remedy is to keep the car but require a price reduction either by future payments or a proportionate refund of what has been paid already.
Complaining to the Financial Ombudsman about your finance lender
Most complaints tend to be resolved with lenders without any further action. However, if it is still not resolved, then you can bring the matter to the Financial Ombudsman Service (FOS). The FOS will investigate your complaint and review the evidence from both sides, taking into account any relevant law but also what is fair and reasonable (they are not obliged to follow the law). Once the adjudicator has reviewed all evidence, they will contact you with an initial decision and explain their reasons.
If you do not agree with initial decision, you can ask an Ombudsman to review the matter and provide a final decision. If the Ombudsman does not find in favour of you, the decision is not legally binding and you do not have to accept it (you could take further action by bringing legal proceedings in the Small Claims Court). However, if you accept their decision then it becomes legally binding on both parties and there is no further recourse.
Other rights: voluntary termination
Another common right for consumers who enter into car finance agreements is voluntary termination. If you have a HP, PCP or Conditional Sale Agreement and you are struggling to keep up with the repayments, the Consumer Credit Act 1974 allows you to terminate the agreement which limits your liability to 50% of the total amount payable. It goes without saying that, before entering into an agreement you should always make sure you can afford the monthly repayments. Provided you have taken reasonable care of the goods and paid any overdue instalments then you will have nothing more to pay.
You do not necessarily need to have paid 50% of the total amount payable as you can terminate at any time by giving notice in writing. However, if you have underpaid, the lender is entitled to the remaining balance which makes up the 50% and this option is not available where the lender has terminated the agreement first. You should note however, that once you have given notice to terminate the agreement, the notice cannot be revoked.
More on Voluntary Termination
14 December 2023 – Financial Ombudsman statistics on car finance
- Vehicle-related complaints now make up 25% of all cases, according to new data released today by the Financial Ombudsman Service.
- The volume of complaints from people financing their vehicles has reached a five-year high.
- Whilst a spike in vehicle insurance cases is being caused by valuation disputes, customer service issues, and delays in payouts.”
11 January 2024 – FCA makes changes to “Discretionary Commission Arrangements” for car loans
The Financial Conduct Authority (FCA) has announced (11 January 2024) changes to the Discretionary Commission Arrangements (DCAs). This is a structure which determines the level of commission a loan broker (car dealer) receives.
Under the DCA, a higher rate of interest rate paid by the borrower will result in a higher amount of commission for the broker. These arrangements created an incentive for brokers to raise the interest rate, thereby increasing the amount borrowers were charged for their car loans.
The FCA banned this practice in 2021.
But since then there has been an increase in complaints about the behaviour of companies lending for car purchase. The FCA has now placed a temporary hold on its complaints process, pausing the 8-week deadline for firms to respond. During this pause the FCA will be investigating the issues and decide what, if any, further action, including legal steps, are necessary.
This pause will apply to complaints received by firms between 17 November 2023 and 25 September 2024. This pause is to stop Claims Management Companies (CMCs) making complaint claims and doing very little work. (There are parallels with the behaviour of CMCs during the the PPI scandal).
The Government has announced proposals to impose fees on CMCs and lawyers for bringing complaints to the Financial Ombudsman Service. The Financial Services and Markets Act 2000 (The Ombudsman Scheme) Regulations 2024 – Draft SI and Policy Note.
For more information, how this affects you and what you should do, see FCA to undertake work in the motor finance market. Always remember that you can make these complaints yourself and ensure you get 100% of the money.
More help and advice on car purchasing and using garages
Car buyers alert: how not to get fobbed off
How not to get fobbed off by a garage (and what to do if you have been!)
All you need to know about car purchasing, financing and garages
How to complain about financial institutions
Further help with consumer issues
Top 20 Tips How to complain effectively
If you need more help, information and tips with how to quote Acts, template letters and advice on how to complain effectively don’t forget the GET THE BOOK! How To Complain: The ESSENTIAL Consumer Guide to Getting REFUNDS, Redress and RESULTS!
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