When purchasing a car paying with cash or taking out a personal loan with the cheapest rate is likely to be the most cost-effective way – but it could leave you financially exposed.
That’s according to the National Association of Commercial Finance Brokers, which has said buyers are throwing away half of their consumer rights protection by paying for their new and used cars in cash.
From paying as little as £100 on your credit card to taking advantage of Voluntary Termination, here are five tips to ensure you’re financially covered when you buy a vehicle.
NACFB board member and car finance expert Graham Hill said it might appear that paying in full with cash or securing the cheapest loan rate – as is often advised – is the most sensible and financially viable way of paying for a motor, but you could end up paying an extra price for the limited consumer rights protection further down the line.
‘Few car and motorcycle buyers are aware that they can be throwing away up to 50 per cent of their legal rights by taking out a personal loan or by paying the whole amount with cash, and this can cost them dearly further down the line,’ he warned.
‘When buying a car, which can often be a sizeable transaction, you need to give yourself all the protections you can.
‘If you can afford to purchase in cash, great, but understand that you will be considerably more exposed if something goes wrong – the same applies to personal loans.’
Here are Graham Hill’s top five tips to give yourself the most consumer protection when buying a car or motorcycle:
1. Put a small amount on plastic
If you’re buying a car outright for cash, possibly a lump sum released from your pension pot, be sure to pay a small amount, even as little as £100, on your credit card.
This immediately provides you with protection under Section 75 of the Consumer Credit Act, which covers any credit transaction between £100 and £30,000.
Graham gives an example. ‘Let’s say you place a deposit of £100 on a car costing £20,000 with your credit card, followed by £19,900 of cash while the dealer carries out the necessary work, but that dealer subsequently goes bust before your car is delivered.
‘In that scenario you can recover the full £20,000 from the credit card company. Note, too, that the credit card company is also liable if the car is not as described, not fit for purpose or faulty and the dealer doesn’t satisfactorily repair it.’
2. Take advantage of a finance provider’s joint responsibility to get a fault repaired
Consider hire purchase (HP) or a personal contract plan (PCP), even if the rates aren’t as competitive as those available from personal loan providers.
That’s because, if there is a fault with your car or motorcycle, an HP or PCP agreement dictates that the finance provider is jointly and severally liable, which in very basic terms means it is equally responsible to fix the problem — and even agree to a full refund of all payments made.
‘This can add tremendously to your legal position, as while dealers may decide to take on an individual consumer, they are considerably less likely to take on the finance company, which will almost certainly side with the customer,’ Graham explained.
‘Also, why would dealers risk ruining the relationship with the very company that finances their vehicles?’
3. Don’t overlook the benefits of Voluntary Termination
Hire purchase and PCP agreements allow you to hand the car back to the finance company once 50 per cent of the total cost (including interest and charges) has been repaid.
This is called Voluntary Termination (VT) and is covered under sections 99 and 100 of the Consumer Credit Act and is again applicable on transactions between £100 and £30,000.
‘For example, if the total cost of your car is £10,000, once you have paid £5,000 you can hand the car back even if the car is worth substantially less than what you would have to pay as a settlement figure,’ Graham explained.
‘Not only could you be in pocket but you could also preserve your credit score, too, since while Voluntary Termination (VT) will appear on your credit file, it will have little or no effect on your ability to take out finance in future.
‘To minimise the damage caused to your credit, speak to the finance company and hand the car back rather than run into arrears or default.’
4. Get access to the Financial Ombudsman Service
Buy a car for outright cash or a personal loan and you’ll have no recourse to the Financial Ombudsman Service if the car has a fundamental fault with it.
But if you use your credit card or enter into a hire purchase or PCP agreement the FOS will be there to help you resolve disputes you may have with the dealer.
5. The FOS will also help you if the car is for business use
Until recently, the Financial Ombudsman Service would not deal with complaints made by small business owners against other companies, only complaints made by consumers.
But a change to European law means it will now take on complaints made by a ‘Micro Enterprise’, defined by the EU as a small business with a turnover or balance sheet worth of less than 2 million Euros and less than 10 employees.
So again, if buying a car privately for business purposes, always pay at least a tiny fraction of the bill with a credit card, or consider an option such as hire purchase.