Pay just £300 a month and drive off in a brand new car. That’s the sales pitch that ignited the motor industry, with millions signing up to buy cars on the never-never.
But there is a fetid underside to these loans, known as personal contract plans and hire purchase, which could leave drivers car-less, owing thousands of pounds, with a ruined credit history and living in fear of debt collectors.
The key fact is that you do not own the car, the finance company does. If you cannot repay the loan, they can take back the car, sell it and pocket the money. They can then force you to pay at least half the loan, plus fees and interest.
Car loans known as personal contract plans or hire purchase could leave drivers car-less, owing thousands of pounds, with a ruined credit history and living in fear of debt collectors
Borrowers owe around £76 billion on car finance. In the year to March, around 2.3 million new and used cars were sold or leased with finance agreements worth more than £36 billion, according to the Finance & Leasing Association. The majority were PCP or hire purchase contracts.
With nine million people on furlough and government advisers the Office for Budget Responsibility warning that unemployment could hit four million, these loans are a timebomb ticking under family finances.
Families such as Anne McLean and Richard Marden, who picked up a former demonstrator Seat Arona SE Technology last December.
This modest car is set to cost them £12,000 for just six months of use, thanks to the punitive structure of these loans.
The couple, from Norwich, were quoted £19,882 for the car under a finance agreement.
Shocked by big bill: Richard Marden and Anne McLean
With an interest rate of 5.9 per cent, the total to be repaid to Seat Financial Services would be £23,172.
The document said this would be in 48 monthly payments of £316.61, plus a final payment of £7,965 to own the car.
When the lockdown was announced in March, Richard, 58, a gardener, lost his work while Anne, 61, an office worker, was furloughed and now fears being made redundant.
The monthly payments were suddenly unaffordable so, sensibly, they tried to contact Seat Financial Services.
Anne says: ‘We sent them numerous emails, two letters (both sent signed-for) and tried to call so many times, but all we got was either, ‘the offices are closed’ or, ‘we cannot speak to you right now’ and then the phone went dead.’
Eventually, they decided voluntary termination was the only option. Seat Financial Services says it will take back the vehicle — which car sales website Auto Trader values at a private-selling price of £14,890 — and sell it at auction.
But Anne and Richard will not see a penny of this and they must also pay £10,600 of the loan.
This is down to an obscure line in the contract small print, which says that if borrowers terminate the contract they must pay ‘a rebate calculated in line with the Consumer Credit (Early Settlement) Regulations 2004’.
In essence, it allows the lender to charge up to half the loan, including fees and interest.
Seat has agreed to reduce payments to £50 a month until September 1.
Anne says: ‘I fear we will end up with debt collectors.’
With the money already paid, their six months’ use of this modest car, which now sits untouched on their drive, is set to cost £11,866. On a repayment rate of £50 a month, the loan would last for more than 17 years.
Bamboozled: The slick sales process is less likely to highlight what happens if you cannot afford payments
The sales pitch to car buyers is simple: you pay a deposit — which the dealer may contribute towards — then agree how much the car will be worth at the end of three or four years, providing you stick to an agreed mileage. For the intervening period you pay the difference through monthly payments.
So if the car is £25,000 and you agree it will be worth £13,000, you must pay the £12,000 difference.
It means that for a £1,000 deposit and monthly payments of around £305 plus interest, you could drive off with a spanking new car — except you don’t actually own it.
Theoretically, the dealer will take it back at the end of three years and you will owe nothing, or you can buy it for a final payment.
But they aim to sell you another car with a new finance agreement. They then have a customer making monthly payments for life.
You will also be encouraged to buy insurance to protect it, which is very lucrative to the dealer.
However, the slick sales process is less likely to highlight what happens if you cannot afford payments.
The sales pitch to car buyers is simple. You pay a deposit, then agree how much the car will be worth at the end of three or four years, providing you stick to an agreed mileage
Besides charging up to half the total loan, including any interest and fees, they can bill you when they collect the car.
Consumer campaigner Martyn James, of Resolver, says: ‘PCP is so complicated I would hazard a guess that most dealerships don’t understand it themselves.
‘In my 20 years’ experience, these deals are more complex than most pensions.’
Last week, the Financial Conduct Authority updated emergency rules governing how PCP borrowers must be treated.
Borrowers can apply for a full or partial payment holiday until October 31, or extend an existing payment holiday by three months.
But, crucially, the lender will continue to charge interest, unless borrowers are in financial difficulty after the deferral.
A spokesman for VW Financial Services, of which Seat Financial Services is part, says: ‘In this situation the customer wishes to return the vehicle early, on an entirely voluntary basis.
Vehicles returned to VWFS are either sold at auction or through a wholesale online sales platform, taking into account a number of factors such as vehicle condition and age.
‘When a customer decides to return their vehicle early, the vehicle is then owned by VWFS and any value that is received from selling the vehicle at auction will remain with VWFS. This is never returned to the customer.
‘When a customer exercises their right to voluntarily terminate, they are liable to hand back the vehicle and pay half of the total amount payable.’
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