Almost half of those who have taken out car finance deals – representing almost three million British drivers – don’t know how much they’ve borrowed to fund their vehicles.
That’s just one of a number of astonishing claims from two new surveys that have raised fears of a financial crisis sparked by debt.
Almost nine in 10 of people with existing finance arrangements admitted in the polls that they don’t understand the small print in their contracts – including excess mileage fees that could send costs spiralling.
Athird are unaware that multiple applications for credit can adversely affect personal credit scores.
How much am I borrowing? New surveys have revealed that many car-buying Britons lack any understanding regarding the car finance agreements they’ve taken out
Around 90 per cent of new cars sold by dealers in the UK are now acquired through finance.
The Society of Motor Manufacturers and Traders confirmed that 1,123,860 new models were registered to private buyers in 2017 – and the Finance and Leasing Association followed by stating that 88 per cent of these (990,029) were financed.
A further 1.4 million used cars were also attained using finance last year.
According to the FLA, some 5.9 million people in the UK currently have an existing car finance agreement.
Fears that drivers are taking on too much debt has led to a Financial Conduct Authority review of the industry amidst speculation of miss-selling and irresponsible lending.
However, the new research will do little to ease concerns. The study of 2,000 people who are currently financing vehicles found that 47 per cent were unable to specify how much they had effectively borrowed in order to get the keys to the new car.
Another 63 per cent told car-buying platform CarGurus, who conducted the poll, that their finance deal was subject to mileage restrictions but didn’t know what this limit was.
Furthermore, more than half (54 per cent) also didn’t know what the penalty charges were for exceeding mileage boundaries that are included in all Personal Contract Purchase (PCP) arrangements – the most popular form of motor finance.
These can vary wildly, from anything between 5p or less per mile over the agreed restriction to 30p for each mile over the pre-arranged limit.
Official stats from the SMMT show that 1,123,860 new cars were registered to private buyers in 2017
Figures released last week by the Finance and Leasing Association showed that 990,029 of these – representing 88% in total – were financed
Despite this obvious lack of understanding, 91 per cent of the car owners surveyed said they believed that they had a good grasp of how car finance works – though 53 per cent didn’t know what ‘PCP’ stands for.
James Drake, spokesperson for CarGurus said: ‘Car finance can be quite complex and when we commissioned this research, we expected to find some level of consumer misunderstanding.
‘What we’ve discovered goes far beyond misunderstanding and clearly needs to be addressed.
‘The fact that 47 per cent of drivers with a car on finance couldn’t tell us what they had effectively borrowed is mind boggling.
‘Car finance is a valuable tool, but consumers need to take more time to understand and educate themselves, as well as making sure that they only deal with reputable dealers who take the time to explain finance products properly.’
Despite openly acknowledging that they don’t have a strong grasp of car finance, three in five buyers go ahead and sign an agreement that ties them into paying for a vehicle for years
And it wasn’t the only concerning study regarding knowledge about vehicle finance.
FairSquare – another car-buying website – said there was a ‘distinct lack of understanding, trust and appeal when it comes to UK buyers approaching finance products’.
Its study of more than 2,000 motorists found that 89 per cent do not fully understand the small print in their finance documentation, such as mileage limits.
Much of the worrying rise in consumer debt is fuelled by car finance deals
Rachel Reeves, Business, energy & industrial strategy committee
But despite this, three in five have still signed up to an agreement without knowing what the consequences of taking on finance may be.
It also found that a third (32 per cent) are not aware that multiple applications for credit can adversely affect personal credit scores.
Paul Bartley, CEO of FairSquare, commented: ‘These results paint a pretty disappointing and unsatisfactory picture of the car buying and financing landscape in the UK.
‘Even if consumers feel they are paying the right price for the car, there is clearly a lack of understanding of the finance products available to them, together with the benefits and risks associated with those products.’
Last month, figures from the RAC revealed that a tenth of motorists are feeling the financial strain of keeping up with car finance repayments.
Almost half of drivers with these arrangement have had to cut back on spending as a result while others have been hit with penalties for handing back their keys early because they cannot cope with the costs.
Experts said many customers were sold deals they do not fully understand, fuelling fears a soaring number of motorists could default on debts and trigger a financial crisis.
Responding to the RAC’s findings, Rachel Reeves, chairman of the Commons business, energy and industrial strategy committee, said in January: ‘Much of the worrying rise in consumer debt is fuelled by car finance deals.
‘Many people are struggling to pay off these loans and are at risk of being driven deeper into debt. The easy car finance offered by some lenders could be a ticking timebomb for the wider economy.’
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