Car Finance: Are You Being Ripped Off?

Over recent years UK car owners have turned to finance to get behind the wheel of a new model. The monthly repayments make it possible to get the latest car available, with four out of five new cars in Britain being bought using credit.

In a world where subscription and pay-monthly services are on the rise for practically every industry, it only makes sense that the automotive world has adapted to suit this. As this research highlights, buying cars and car ownership could even become a thing of the past if we have a ‘Netflix-style’ attitude to driving as and when needed.

We’re not there quite yet, however, and car finance is still a key part of the expenditure of many households. So, are we getting a good deal?

Hidden fees

The thought of a brand-new car packed with all of the top built-in gadgets is tempting to many drivers. However, as technology evolves, so does the price. With some cars costing the same as someone’s annual salary, finance is seen as an affordable way to get the car of your dreams without setting you back financially – but there are some things to consider which could see that price hike.

Recently it has been revealed that customers who opt to buy a car on finance could face being charged as much as £1,200 in hidden fees by simply not comparing finance options.

A close up shot of a calculator

The motor financing industry came under fire when it was investigated by the Financial Conduct Authority (FCA) amid allegations that motorists were being overcharged by millions of pounds a year. The FCA found an issue with commission models that allow brokers discretion to set the customer interest rate, and therefore earn a higher commission. This can then see the customers pay significantly more for their finance.

Jonathan Davidson, the FCA’s executive director of supervision for retail and authorisations, said: “We estimate this could be costing consumers £300m annually. This is unacceptable and we will act to address the harm caused by this business model.

“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”

This news demonstrates the vital importance of checking the terms and conditions of a finance deal – and highlights just how many motorists are getting stung by fees.

Avoiding charges

One way to avoid falling into a financial trap is by gaining a more thorough understanding of the options open to you. By knowing this – and weighing them all up – consumers stand a better chance of getting a better deal.

PCP (personal contract purchase) and hire purchase (where you pay the price of the car off in instalments) are the two most common forms of motor financing.

Agreeing to a loan on a laptop

Hire purchase is largely self-explanatory – with payments covering the cost of the vehicle over the period of the loan. PCP, meanwhile, is a loan based on the vehicle’s estimated value at the end of the contract, rather than at the beginning. The borrower will put down a deposit and, with the dealer, decide how much the car will be worth at the end of the term (usually two-three years). Once the term is up, the borrower can pay the outstanding balance left on the car (which is known as the balloon payment) and then own the car outright, or they can hand back the keys, get a new car and repeat the process.

Tips for avoiding hidden fees include:

Get the mileage right

Think about how many miles you clock annually and make sure you’re realistic. Make sure the deal you’re signing covers the amount you are saying you’ll log and be sure you don’t go over; extra miles will soon start to rack up the pounds.

Shop around

Like you do with car insurance, be sure to compare finance options to get the best deal. You may find a deal which has a lower APR or deposit.

Have a budget and stick to it

Don’t get swept off your feet by your dream car. Dreams can quickly turn into nightmares if you overcommit. Factor in running costs too – some cars will cost more in tax, insurance and fuel once you take the keys and this can quickly drain your finances.

It’s your choice

It’s important not to feel pressured. A car dealer might have an offer on – and your salesman might have an incentive to push it – but it’s essential to take time to weigh things up properly. You might well find that taking a personal loan offers a better deal, for example, and finance providers can clear the funds into your account quite quickly to allow you to use a loan to fund a cash purchase. Don’t rule this – or any other option – out and take time to understand the strengths and weaknesses of all options. The first step towards getting a better deal is to understand the danger posed by the potential of a bad deal.

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