Car loans: What the FCA’s changes to loans and financing deals mean for drivers

Car loans: What the FCA’s changes to loans and financing deals mean for drivers
Car loans: What the FCA’s changes to loans and financing deals mean for drivers

The cliché of the dodgy used car salesman could soon be a thing of the past following a proposed regulator crackdown on unfair and misleading car loans.

The Financial Conduct Authority (FCA) said it wants to ban the way that some dealers and brokers make commission on sales that is tied to a car financing deal’s interest rate. It says this “creates an incentive for brokers to act against customers’ interests”, and that new rules could save drivers a total of £165m.

But one finance provider says that plans to make commission payments more transparent will not stop the need for drivers to shop around.

A survey of 2,000 drivers found that those who opt for the first result end up spending an average of £11,000 more over a lifetime than drivers who search for the best deal.

The research, conducted by peer-to-peer lender Zopa, also found nine out of 10 car buyers could not identify the cheapest finance deal and nearly half the car buyers surveyed had no idea what type of finance they had taken out.

Didier Baclin, Zopa’s chief product officer, says: “Complex finance deals, baffling jargon, stressful dealership experiences and difficulties faced comparing prices are leaving Brits confused and paying more than they need to; car buyers admit they don’t understand the language or the finance options explained to them.”

Zopa asked consumers to choose the cheapest out of five common car finance options. It found nine out of 10 buyers struggled to choose the lowest cost option. Zopa also found one in four car buyers took out a car finance loan they didn’t think they could afford. In March, the FCA found people using finance to buy a car may have been overcharged on their interest payments by £1,000.

More choice

Mark Turner, managing director in Duff & Phelps’ Compliance and Regulatory Consulting practice, says car financing has improved buyers’ choice. “The dealerships and finance companies are at risk of margins being put under pressure and of regulatory scrutiny.

“Some sales techniques that might have previously been seen as standard practices may no longer be acceptable in the eyes of the regulator.

“The FCA considers that in some cases dealers are being driven by financial incentives which might not always result in them acting in the best interest of the customer. However, there is nothing fundamentally wrong with providing finance to consumers, and reputable dealers can offer innovative and profitable products that also offer a good deal to the customer in a transparent way.”

Financing your car

Salman Haqqi, a personal finance expert at Money.co.uk, says finance isn’t always the best way to buy your car. “If you have the money upfront, buying with cash can be the cheapest option – it’s hassle-free, won’t involve a credit check and sometimes a dealer will give you a discount.

“Other options include a 0 per cent money transfer, which gives you the option to transfer funds from a credit card into your bank account. You’ll need to pay a transfer fee and you’ll have a set number of months to pay off the balance interest-free.”

‘Even the dealer was confused’

Yoni Jacobs found himself confused by the different options

Yoni Jacobs, 43, who lives with his wife and three children in North London, went to buy a Volvo from a local car dealership in June.

“I work in IT and I would consider myself fairly financially literate but when it came to buying a car, but I suddenly found myself extremely confused,” he says. “The guy selling us the car seemed confused himself. So in the end I went away and decided to look at all our options.”

Eventually he decided to go for a PCP.

“This gave us more flexibility. My oldest child is 11 and I can already see one of my main jobs is going to be a taxi driver. There is a danger that my car will go into negative equity, but I feel empowered having gone away and looked at my options. I ended up using Zopa, it was easy to understand, as much as car finance can be.”

There are a number of vehicle finance options, here we analyse some of the most popular ones.

Hire Purchase

With a hire purchase agreement you put down a deposit to buy a vehicle and pay off the rest over time, normally between one and five years. At the end of the hire purchase agreement you will have paid off the vehicle in full.

Salman says: “The benefits include low interest rates, flexible repayment rates and no mileage restrictions. However, you’ll likely have higher monthly payments and you’ll usually need a 10 per cent deposit.”

Personal Contract Purchase

PCPs are often sold by dealerships alongside their vehicles and normally last for two to four years. You pay a deposit at the start of the PCP and monthly instalments for the duration of the term. At the end of the plan, you can choose to pay a lump sum to buy the vehicle – sometimes referred to as a balloon payment.

Salman says: “If you decide not to pay the final payment you can either hand the car back or exchange it for a new PCP agreement and get a new car.

“The benefits include lower monthly payments, a smaller deposit and flexibility. However, you’ll usually have mileage limits.”

Personal Contract Hire

This is when you rent a vehicle from a dealership, meaning you never actually own it. The rental payments cover how much the vehicle will depreciate. These sorts of agreements are popular with businesses.

“You don’t have to worry about depreciation and maintenance costs may be low. You need comprehensive insurance though and there will be mileage limits too,” says Salman.

Personal Loan

“The most you can usually borrow using a personal loan is £25,000 and you may need to pay it back over two to seven years,” says Salman.

“You’ll own your car straight away and you’ll have no mileage limits but your loan rate may be higher.”

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