The Best Car Finance Blog In The World

Just imagine, you’ve had your car for the last 3 years without any problems at all. You got it from your local dealer on a special PCP scheme they had running at the time which made the deal attractive and the cost low. You know how the PCP scheme works as your last car was on a similar scheme, you put an amount down, make regular monthly payments by direct debit and you then have the option to either pay the final (balloon) payment or simply hand the car back. You told the salesman, 3 years ago, that you would cover 30,000 miles over the 3 years and as you have 6 weeks to go and you have only just covered 25,000 miles you won’t have a problem with an excess mileage charge if you decide to hand the car back.

So far so good. You take a quick look at the contract and you see that the final balloon is just over £6,000. It seemed a little high but you thought you would drop into the dealer to see what the car was worth in the event there was a profit in the car and you could use it as a down payment on your next car.

Oh dear! Bad news, after the obligatory sharp intake of breath the salesman advises that the car is only worth £3,500, they may be able to squeeze £4,000 if you part exchanged against certain cars they have in stock. Well that’s no good because you would still be £2,000 out of pocket.

So you decide to simply hand the car back and start the search for a replacement car. The nightmare begins. You phone the funder to arrange for the collection of your old car but the person at the other end of the phone advises that with this type of agreement, whilst it may appear to be a PCP (personal contract purchase), it isn’t and you have to make the final payment whether you like it or not. Panic!

What are you going to do? You haven’t got the £6,000. If you go the part exchange route you are still £2,000 out of pocket. You call the dealership but the salesman is no longer there and they point out that your contract for the finance is with the lender and ‘did you not read the contract?’ Which of course you didn’t.

These contracts were common, and still are, as they are a way for consumers to reduce the monthly payment considerably by increasing the final balloon payment beyond the true worth of the car. One of the reasons why you should never make a finance decision based on just one factor, such as rate, as there is invariably a compensating factor somewhere in the terms that enables the lender to provide the low rate.

So what can you do in these circumstances? You can claim that the contract was miss-sold and make a complaint to the financial ombudsman service, but that will take time and of course without proof that the salesman stated that you could simply hand the car back at the end of the agreement it may be down to you assuming that you were entering into a PCP agreement.

So are you now in a very difficult spot with the lender? Do you try to reduce the pain by trying to move some of the difference between the part exchange value of £4,000 and the £6,000 owed into the cost of the new car? Actually, you will probably not need to do either.

As regular readers of my newsletter and blog know I have quite a lot of knowledge in the area of vehicle finance. You need to check your agreement to see that it is a regulated agreement (it will state so at the top). You then need to check down the front page to find a section entitled ‘Termination – Your Rights’.

In this section it will give a minimum payment that you must make before handing the car back under the Voluntary Termination rules. Take away from this figure the initial payment/deposit and any fees/charges that you made at the start of the agreement, often referred to as an arrangement fee or documentation fee.

Divide the remainder by your monthly payment amounts and this will tell you how many months you will have to pay before you can simply hand the car back to the lender. In such contracts with an overstated balloon you may find that you have to make 34 or 35 payments before you have reached that 50% figure.

However, assuming that you have reached this 50% mark, you can telephone the lender and say you want to VT the agreement. They will then make the arrangements for the car to be returned to the dealer from where you bought it. Job done.

Personally I am totally against VT and think it should be removed from the Consumer Credit Act but whilst dealers and brokers try to rip off their naive consumer customers you must continue to use it in order to escape the problem.

Obviously all of the PCP agreements issued by yours truly conform to standard PCP principles. I may be a little more expensive but come the end of the contract you’ll be able to sleep at night. By Graham Hill