Everything you need to know about financing your car purchase

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!

Everything you need to know about financing your car purchase
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 finance options are available?
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.

There’s a problem with my car, what can I do about it?
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.

Complaining to the lender
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
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

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!)

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Why use the Financial Ombudsman?

I’ve used the Financial Ombudsman a couple of times and obviously both times he found in my favour! Both times were Halifax too! Here, Patrick Hurley, Director of General Casework describes why and at what point you should contact the Financial Ombudsman.

Patrick Hurley Director of general casework
Patrick Hurley Director of General Casework

People often ask, what does the ombudsman service stand for? There’s a potentially long answer to that. But I think the short answer and the right answer is fairness.

But what is fairness? It’s not always easy to define; it can differ according to culture, the situation you’re in or your personal values. However, it’s a near certainty that all of us, at some point, will be subject to that clear sense of outrage that something unfair has been done to us.

The science behind this is as complex as the feeling itself. The part of our brain that assesses fairness is linked to the same section that registers disgrace and disgust. We’re emotionally programmed to react with strong negative feelings at the thought of injustice whereas we experience a more positive, settled response to what we perceive as being fair treatment.

Explaining an emotional reaction when there is something obviously unfair is easy. For instance, if someone were to take £500 from you for no reason and then refuse to give it back. There’s one clear act of wrong doing, a loss that can be quantified and a straightforward way to make things fair again. This is a situation where those three words we’ve all used at some time “That’s not fair” clearly apply …and most people would agree.

But what if the thing that triggered the emotional reaction isn’t as clear cut as that? What if it’s something you can’t quite put your finger on? Or a culmination of things over the course of several months that has left you with that sense of outrage? Or there’s simply been poor service?  Trying to explain why something that to most people is a relatively small incident is in fact a “final straw” moment for you can be tough. It can be even more difficult if there isn’t really a clear resolution you can point to – you just want it putting right.

When this happens, many people don’t always know where to turn and the temptation can be to give up. That’s what people tell me when I ask them why they haven’t used the ombudsman all too often – particularly from people who didn’t want to complain as it was over something ‘small’. Yet that’s exactly what we’re here for.

We are here to look at problems about fairness in money matters as a whole – big and small. Everything from the loss of £150,000, to a person being inconvenienced by poor service such as bank statements being sent to the wrong address, that ‘final straw moment’ where you find yourself having the same conversation asking the bank to sort out the same problem, and lots in between.

People also often worry that it’ll be a really complicated process to come to us and the business they are complaining about might turn on them. Just to reassure you, this should never happen. All you need to do is give us a call us, go through what happened in your own words and we’ll take it from there. Yes there are some rules but we’ll talk you through them in plain English.  That’s essentially our process.

So, my final words would be these; the next time you get a gut feeling that something’s not right, don’t write it off. Even if it takes you a while to explain the circumstances that led you to your “it’s not fair” moment, call us.  It can be about a lot of money, a little, or even just a point of principle.  And often the people we help simply want an apology or an explanation. Of course, we won’t always find that something wrong has happened, but we will let you know what we think. Either way, the ombudsman can help you work through what the problem actually is and figure out what can be done to make things right again.

You can find further information on the Financial Ombudsman on their website here.

How to Complain: The Essential Consumer Guide to Getting Refunds, Redress and Results!

 

Before you go to the Financial Ombudsman do follow these tips when you complain and for more information, guidance, consumer laws, rights and templates for complaining about just about anything in most sectors GET THE BOOK! How To Complain: The ESSENTIAL Consumer Guide to Getting REFUNDS, Redress and RESULTS!