Comment: Car finance's lack of transparency is hurting consumers

As consumer debt continues to pile up, writes Graham Hill of the National Association of Commercial Finance Brokers, the last few months has seen scrutiny turned on various lines of credit.

This new focus has included a warning from Bank of England officials and an investigation by its financial sector regulator.

Some of the most severe criticism has been levelled at car finance products which I feel, for the most part, has been misguided.

You can see why it’s an easy target though. An astonishing eight in 10 new cars last year were bought on mainly dealer provided personal contract purchase (or PCP) plans, with a massive £41bn in motor loans helping fund record levels of car sales last year.

A PCP is made up of a deposit, a series of monthly instalments and a final payment, which you can either pay off to own the car or simply hand it back. The increased popularity of this relatively new product has painted a giant target on its back.

The criticism of PCP finance follows two broad lines; that the spiralling number of PCPs could see the consumer debt pile come toppling down, precipitating the next financial crisis; and that customers have been sold these deals without fully understanding what they’re getting into.

The first point speaks to the post-Crash mentality which we haven’t quite shaken off. Commentators have continued to conflate toxic mortgage loans with this boom in sub-prime car lending, pointing to the closure of a couple of high-profile lenders as evidence of the market’s imminent demise.

Admittedly, concerns of a car finance bubble are legitimate but as the value of the car market is only about a tenth the size of the housing market, in my eyes it’s the second point that’s far more alarming.

PCP MIS-SELLING AND MISCONCEPTIONS

The Financial Conduct Authority is currently looking at car finance deals - specifically PCPs - to see if they are being mis-sold by dealers. The FCA's concern is that consumers are getting into deals that they have very little knowledge of.

In some cases, the evidence of mis-selling has been pretty damning - from entirely different finance products being sold as PCPs to a lack of explanation around what finance might actually be best for the customer around the range of finance and options available to the customer.

Some of the issues lie in the perception of ownership. PCPs are thought of as a route to owning your car - you simply pay off the balloon payment at the end of the deal and it’s yours.

The problem is that around eight in ten people hand the car back at the end of the deal, usually intending to upgrade to a new model.

As such, there are a number of considerations that are rarely explained by the dealer when selling you this product. For example, when you hand the car back you need to provide the spare key as well - or could face up a £400 bill to replace the key which can be more akin to a computer these days.

People are also often under the assumption that they must return to the supplier dealer. This creates a beneficial circle for the dealer, as you are essentially bound to go back to them for all of your future car needs.

In fact, you could head to another dealership to part-exchange the car - if you shop around, you may discover there is more value in the car than the supplier dealer would quote you. In short, it pays to shop around.

One of the central issues is that customers are rarely armed with the right information when they head to a dealership.

Sales practices and bonuses also incentivise car dealership staff to close deals then-and-there, when in fact consumers need the time and space to understand what they are getting into.

Unless transparency around these deals are improved, consumers will continue to feel pushed into deals that may well be wrong for them.

Graham Hill is a car finance expert at the National Association of Commercial Finance Brokers.