Sold a Car on Unaffordable Car Finance?

Were you sold a car on unaffordable finance?

The FCA has published its long-awaited review of car finance:  FCA - 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.

The FCA has said:

"We are not satisfied that all lenders we surveyed were complying with FCA rules on assessing creditworthiness, including affordability. Some seemed to focus unduly on credit risk (to the lender) rather than affordability (for the borrower). "

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.

These checks are too often inadequate

This BBC story ‘Car payments are ruining our lives’ has an example of where a 23 year old student with a part-time job was sold a 21k Audi on finance, with apparently no affordability checks at all.  But it’s probably more common that a quick and inadequate check was done.

A car finance expert makes a lot of excellent points in this article: The car industry need to be more honest when selling car finance says:

It’s time for the car industry to do better, even if it’s to save customers from themselves.

But if you are one of the people who is already in trouble with car finance repayments, that isn’t going to help you. So here I am looking at your practical options.

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 charity Factsheet on Time Orders 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.

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.

LETTER TO RAISE THE COMPLAINT

[Your Name]
[Your Address]
[City, Postcode]
[Email Address]

[Date]

Customer Complaints Department
[Finance Company Name]
[Company Address]
[City, Postcode]

Subject: Request for Full Refund of Interest and Charges – Agreement No: [Insert Agreement Number]

Dear Sir/Madam,

I am writing to formally raise a complaint regarding the above car finance agreement, which I believe was unfair and/or mis-sold to me. I request a full refund of all interest and charges applied to this agreement, along with any associated fees.

I believe that the finance agreement breached regulatory guidance for the following reasons:

1. Affordability Concerns: The finance agreement was granted without proper affordability checks being carried out, despite clear indications that I could not afford the repayments without experiencing financial hardship.
   
   

2. Irresponsible Lending: You failed to ensure that the agreement was suitable for my financial situation. Had proper due diligence been undertaken, it would have been clear that I was unable to maintain repayments sustainably.
   
   

3. Unfair Terms and Lack of Transparency: The terms of the agreement were not fully explained to me, including the total cost of credit and the long-term financial implications. I believe I was not provided with adequate information to make an informed decision.
   
   

4. Failure to Assess Vulnerability: [If applicable] I made you aware of my [health/financial] circumstances at the time, and this was not taken into account when the agreement was issued.
   
   

In light of the above, I am requesting:

• A full refund of all interest and charges applied to the agreement.
  
  

• The removal of any adverse information from my credit file relating to this agreement.
  
  

• Statutory interest at 8% per annum from the date of each payment made, until the date of settlement.
  
  

Please treat this letter as a formal complaint under your complaints procedure. If I do not receive a satisfactory response within 8 weeks, I will not hesitate to escalate my complaint to the Financial Ombudsman Service.

I look forward to your prompt and fair resolution of this matter.

Yours faithfully,
[Your Name]

CONSIDER ADDING MORE DETAIL AND ADDING BANK STATEMENTS

[Insert your name and address]

[insert date]

[insert name and address of payday loan lender you had your payday loan with]

Dear Sir or Madam,

Account number: [insert account number]

I have had the above account since [insert date] but believe it was mis-sold to me. [Insert reason for complaint - see below (1)]

I enclose copies of my bank statements dating back to when the first payday loan was taken out and any related documents.

I am writing to ask you to refund the interest and any charges I paid, plus statutory interest, and to delete any negative information from my credit record.

I look forward to your response within eight weeks, otherwise I won’t hesitate taking my complaint to the Financial Ombudsman Service.

Yours faithfully,

[insert your signature]

[Insert your name (printed)]

1. INSERT ONE OF THE FOLLOWING PLUS ANY ADDITIONAL DETAILS:

• It was not made clear to me how much it would cost in total to repay the loan.

• I wasn’t given full or accurate information about how and when to pay back the loan.

• My finances and/or personal situation was not sufficiently checked to make sure I’d be in a position to pay back the loan (here you can take such things into account as your age, mental health, employment status, income, expenditure, proof of identity or financial history).

• I was not told by the lender that a payday loan should not be used for long-term borrowing or if I was in financial difficulty.

• I was not told by the lender what to do if I had a complaint.

• It was not made clear to me by the lender how continuous payment authority works and my right to cancel it.

• I was not told in advance by the continuous payment authority that it was going to take money from my account in this way.

• The lender did not include a risk warning about late repayments in its online advert/email/text message.

• When I couldn’t repay the loan the lender didn't deal with me sympathetically and positively.

• When I couldn’t repay the loan the lender didn't offer to freeze interest and charges when I was unable to make payments under a reasonable repayment plan.

• When I couldn’t repay the loan the lender didn't tell me about free and independent debt counselling organisations.

• When I couldn’t repay the loan the lender pressurised me to extend the loan.

• When I couldn’t repay the loan the lender didn't tell me about the risks of extending the loan.

• When I couldn’t repay the loan the lender didn't make clear exactly how much it would cost to extend the loan.

• When I couldn’t repay the loan the lender didn't check my personal finances and general situation to see if you're able to pay back an extended loan.