It’s official. I’m a grown up. I have a baby on the way and my husband and I have just ordered a new family car.
We checked it had the Isofix car seat fitting system, selected the window blind option for the rear seats and made sure that our travel system (which seems to be the new name for a pram) fitted comfortably in the boot.
The make and model we’ve gone for is a bit of a step-up from the 11-year old Ford Focus we’ve been tearing about in for the past six years, so rather than wipe out our entire cash reserves we decided to go for a finance deal.
‘It’s never been cheaper to buy a new car on finance,’ said the dealer, and he’s pretty much spot on. A combination of generous deposit contributions, falling interest rates and increasing competition among dealers means there are some great deals to be had. And we managed to save around a seventh of the list price.
But while I’m satisfied we acted responsibly in researching the terms of our finance agreement, I don’t think the car salesmen we bought from acted responsibly in the way he sold it to us.
The loan will be our biggest financial outlay other than our mortgage. So I was shocked when the dealer turned around and told us which finance deal was ‘best’ for us.
He didn’t know anything about our circumstances. He didn’t even ask for proof of income. And as far I’m aware he’s no financial adviser. He’s a car salesman – and one earning commission from both the sale and finance deal.
It’s one thing pointing out the costs of different options, and their pros and cons, but it’s quite another to tell someone what they should do when it comes to spending a significant sum of money.
The deal he was pushing was a PCP – a Personal Contract Purchase. It’s a very popular option, with around three-quarters of UK new car sales financed with one, according to the Finance and Leasing Association. You pay a deposit and spread some of the car cost over a fixed period, during which you make monthly repayments.
Unlike a Hire Purchase Agreement, where you spread the entire cost of the car over the loan (minus a deposit), you don’t own it outright at the end of the fixed period. At that point, you can choose to make a ‘balloon payment’ – typically for the majority of the car price – to own it, or hand back the car to the dealer, or use the car’s value as a deposit towards another new car.
What the dealer failed to mention was that the bigger the deposit you put down, the more you can reduce the portion of the car price you’re charged interest on.
Instead of taking his recommendation, we instead asked about topping up the deposit to reduce the overall cost. The dealer confirmed that this was indeed an option. And the saving was significant – thousands of pounds – and clearly for our circumstances this was our best option, not the original version the dealer had tried to flog us.
While we will most likely trade the car in at the end of the three-year payment period, if we had planned to buy the car outright at the end of the agreement, actually what would have been best for us would have been a personal loan for the full sale price. A quick search on the comparison sites revealed that we’d be able to secure an interest rate of half what the car finance deal offered.
We were surprised that the range of options with their advantages and disadvantages were not clearly laid out and, were it not for a background in personal finance, we may not have been able determine our best option with the information provided.
The exchange made me realise how easy it is for unsuspecting customers to get caught out.
While it’s true that the City regulator has stepped into oversee the car finance industry and dealers can be fined and imprisoned for misleading customers, much more needs to be done to safeguard new car buyers.
The Financial Ombudsman Service informed me that had I taken the original deal prescribed as the ‘best’ by the dealer and subsequently complained to the FOS that I had been misled into taking out credit, then it would likely have upheld my complaint.
The Finance and Leasing Association’s motor finance members, who provide the funding for car finance agreements, pay for a training programme that tests car sales staff once a year on their financial knowledge and capability. But this didn’t stop our car salesman doling out misleading information that could have cost me dear. It’s time for the regulator to start policing the industry a lot more closely.
Laura Whitcombe is knowledge and product editor at ThisisMoney.co.uk.
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