Motor finance broker, blogger and author Graham Hill takes a closer look at some of the more recent examples of motor finance product, and argues that the rules governing them are in need of tuning up.
This year, I am running a campaign to change our consumer credit laws – especially those that cover the area of motor finance.
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We have two products that account for the vast majority of new car finance: contract hire and Personal Contract Purchase (PCP). Contract hire accounts for about 85% of company acquisitions, while Personal Contract Hire (PCH) is now starting to take market share away from PCP, which recently dropped from 85% of consumer new car registrations to 80% in 2018.
However, PCP is currently being used by more people to finance used cars – it is estimated to have increased the number of live PCP contracts to around 5 million.
The point is that we have two major finance products that are fudged in legal terms. Legally, there are no such products as PCP or PCH, even though they represent the largest number of agreements.
Take out a hire purchase or personal loan agreement and you are pretty much covered for all eventualities by the UK laws that govern them. But take out a PCP or PCH and you are referred to the Consumer Credit Act, which was never set up with contract hire or contract purchase in mind. This means the providers can pretty much include any terms they like into the contract without fear that they are breaking any laws.
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By GlobalDataLook at the top of a PCP agreement and it will show it as a hire purchase agreement, which it is not: it is a hire purchase agreement with a load of conditions.
The same applies to PCH: the documents will show it as a hire agreement, regulated by the 1974 Consumer Credit Act, which pre-dates the existence of PCH. So, each finance provider has pretty much free rein to include any terms and conditions they see fit.
Two examples of confusing situations come to mind that cause all sorts of problems with consumers. The first relates to PCP and what is known as Voluntary Termination (VT), which is the ability under clauses 99 and 100 of the Consumer Credit Act to hand your car back once you have paid 50% of the total owed. The problem here is that the lenders do not like it, because it can lead to losses – especially if the car has covered a very high mileage.
As an example, let us say that you VTed a car after two years of a three-year contract. Your contract mileage was 10,000 per annum, so you should have only covered 20,000 after two years, but what if you actually covered 28,000 miles? Your excess mileage is, say, £0.10 per mile, so in theory you should be charged a pro rata excess mileage figure of 8,000 miles at £0.10 plus VAT, giving a total of £960.
This is the argument put forward by lenders; it is, in fact, incorrect, and flies in the face of the Consumer Credit Act that was created before such things as excess mileage. The law states that you can hand the car back to the lender irrespective of the mileage. However, when Renault pushed for payment from a customer and the Financial Ombudsman Service got involved, it found in favour of Renault.
It would be so easy to include a few changes to current legislation, or introduce new legislation that dealt with PCP and set down a rule. It would save lots of confusion.
The issue that comes to mind with PCH is the extension of contracts. Every leasing company that allows for an extension – and not all do – has a different way of calculating the lease-extension rentals, which is wrong. There should be a standard method to remove confusion and make the extension transparent.
I have a case against Mercedes-Benz, which increased my monthly payments by 20% for an extension, even though my mileage was running at far less than that for which I was contracted. Laws should make life less complicated – not more!
