Buying a new car using finance
According to the Finance and Leasing Association (F.L.A), 91.2% of all new car registrations in 2018 were financed by F.L.A members, meaning people took motor finance out to fund the purchase of a new car. This totalled £45.9bn borrowed in 2018 and 2.9 million cars that were financed by F.L.A members. However, in 2018 the Financial Conduct Authority (F.C.A) looked into how eligibility for motor finance is assessed, and in November 2018, they issued new guidelines. So, what do you need to know when considering buying a new vehicle using finance?
The BBC reported that in 2018, 8,934 people complained to the Financial Ombudsman Service, an increase of more than half from the previous year. The complaints were about a range of concerns from the quality of the vehicle to, more worryingly, people not knowing what type of finance they were on and being sold cars or finance plans they couldn’t afford.
While compared to the number of vehicles sold using motor finance, the number of complaints may seem low, it could be assumed that several people who are unhappy with their arrangements do not contact the Financial Ombudsman Service. This is possibly because they do not think there is any recourse they could take or are unaware of the available help.
In 2018 the FCA looked at the practices used for car finance and issued a report on their findings and new guidelines. They found that in some cases, lenders were using credit risk to assess an applicant’s suitability for finance and not considering affordability.
The issue with not taking affordability into consideration is that there is no sound basis on which to assume that buyers could meet the repayments over the period of the loan. Both credit risk and affordability together would have given a more complete picture.
The new guidelines issued by the FCA mean that:
- Firms must make a reasonable assessment of creditworthiness based on sufficient information. They must not lend unless they can demonstrate that they have had proper regard to affordability risk in the individual case.
- The extent and scope of an assessment should depend upon, and be proportionate to, the individual circumstances. This means that the firm should take into account the type and amount of credit, its duration, the cost of the credit, and the total amount payable, both in absolute terms and relative to the customer’s financial situation where known.
- The higher the affordability risk, the more rigorous the assessment is likely to need to be. For example, the firm may need to obtain additional information, or subject it to additional scrutiny. Firms should consider whether information should be verified, and by what means, to ensure that it is reasonable to rely on it, and how it should be factored into the assessment.
- Where income is not taken into account in the assessment, the firm must be able to demonstrate that affordability is obvious. If not, the F.C.A rules require it to take reasonable steps to establish or estimate current income and likely future changes (where these could impact adversely on affordability). It is not generally sufficient to rely solely on self-declaration by the customer.
- Where income is taken into account, the firm should also take account of nondiscretionary expenditure (including other credit and non-credit commitments and essential living expenses), unless it can demonstrate that it is obvious in the particular case that the customer’s non-discretionary expenditure is unlikely to affect affordability risk significantly.
- Any estimates of income or expenditure should be reasonable in the circumstances. Again, the firm should be able to demonstrate this if challenged. It may not be reasonable to rely on statistical data if the firm has reason to suspect that the customer’s non-discretionary expenditure is significantly higher, for example, because of their personal or household situation.
- Firms’ policies and procedures should set out clearly the principal factors to be taken into account in assessing creditworthiness, including affordability, in individual cases. The firm must assess and periodically review the effectiveness of its policies and procedures, and its compliance with CONC, and take steps to address any deficiencies identified.
What do you need to know?
If you are looking to purchase a vehicle using finance, then it is essential to consider your options and whether it is something you wish to commit to in the longer term.
Finance is often over several years, while you may be able to afford the repayments now if your circumstances changed, what could be the impact? How would you meet your financial commitments if you lost your job, became ill or had a child, for example? You can find out more about how you could financially protect yourself if the unexpected happened here.
It is crucial to understand the terms of the loan. Are you required to make a lump sum payment at the end of the finance term to buy the car? If so, how will you fund this?
What happens if you default on the loan, your car is involved in an accident and written off, or you wish to sell the vehicle?
Can you pay off the loan early without penalty?
The company you use should comply with the FCA regulations and ask for proof that you can afford the loan. If they do not ask you for the information stated above, then you may want to consider not using the firm. Ensure that any lender you use is adhering to the guidelines, even though it may be tempting just to take their offer. The regulations are in place for your protection, and no matter how frustrating it may be to find that you are not eligible for finance, in the long run, it is essential for your continued financial security.
Consider all your options for financing a vehicle. While the garage you are buying from may be able to offer finance through a lender they are affiliated with, it doesn’t mean it is the best solution for your circumstances. Look at whether you could get a loan through your bank, another lender or access the money needed in some other way. Think about the interest rates being quoted and the terms of the loan itself to assess whether it is going to suit your needs.
If you agree to car finance and immediately regret your decision, you do have a 14-day cooling off period in which you can cancel under the Consumer Credit Act 1974. For products purchased on finance this may require that you haven’t used the item or if you have borrowed funds, all money owed needs to be returned along with any interest accrued. However, it is worth noting that you may still lose any deposit you have already paid. You can find out more about this here.
If you are worried about your car finance
If you are concerned about your motor finance and the way it was administered, then you could complain to the Financial Ombudsman Service. However, you may wish first to discuss your worries with your lender and see if they can offer any recourse. For further guidance, you can contact the Financial Ombudsman Service, details of how to do this are on their website.
If you are struggling to meet your financial commitments or money issues are affecting your financial health, then you can get free help from several organisations. You can find a list on the Money and Mental Health Policy Institute website.
You may also want to seek professional advice if car finance is just one aspect of your financial concerns. We offer a complimentary 30 minute consultation to anyone who would like some guidance from one of our Life Centred Financial Planners. There is no cost to you and no obligation to sign up to anything. We are happy to listen to your concerns; run through any options you are considering or just give you peace of mind that you are making the right decisions. As independent financial advisers, our Life Centred Financial Planners are passionate about supporting you to create a brighter future for yourself and your family, so why not get in touch today and see how we can help.
If you found this information useful, you may also want to check out the following:
- Reducing the cost of company motor insurance
- 8 financial figures all business owners should know
- Case study: How we helped a young entrepreneur set up his first company
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