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Car finance customers face mortgage-style affordability checks

Financial experts and regulators are concerned about the possibility of another 2008-style financial crisis, fuelled not by mortgages but by non-performing car finance agreements.

The Financial Conduct Authority (FCA) has recently expressed concerns over household debt rising by 10.9 per cent year-on-year, similar to the state of affairs prior to the last financial crisis. The FCA believes this is fuelled in no small part by increases in the car finance market, reported to be worth over £31bn in 2015.

What is the problem?

Car dealers are offered incentives by lenders to sell cars on finance rather than on a cash or similar purchase, which the FCA believes could lead to conflicts of interest. It is not just a problem of lending, but the sort of lending.

Under a traditional hire purchase scheme, the car is owned by the buyer and the loan functions in the same way as a mortgage: if there are any problems, the car can be sold to pay off the loan. Hire purchase schemes are being replaced by PCP, or personal contract purchase, whereby the car is leased to the purchaser for a fixed period and the purchaser is given the option to buy the remainder outright. As the duration of the loan is fixed and the purchaser does not own the car, there is often no way out of the loan.

The combination of incentives for car dealers to sell through PCP schemes and the inability for the customer to get out of the loan in the event of trouble means there is a much higher risk of people with no capacity to pay off a loan being sold it anyway.

What if I want a new car?

You do not need to worry about saving up enough cash to buy a new car, as finance is still available and does not have to be a major risk for anyone involved. The best thing you can do is to seek finance advice from a vehicle management company, such as for car leasing in Leicester.

An independent expert will evaluate your finances and not only help you to obtain financing but also make sure it is a deal you can reasonably afford. This will remove the incentive for the car salespeople to sell you something you just don’t need.

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