What is Irresponsible Lending?
Irresponsible lending can cover a wide spectrum of inconsistencies from that which any lender should follow in order to correctly assess and provide requested finance to the commercial reality of pushing loans to meet targets and profitability that the business wishes to achieve in any market.
The FCA has regulation in place that firms should follow and in doing so the customer will be protected. Whether that leads to loans or borrowing being agreed, to the application being declined or other alternatives being discussed and taken.
The mainstay of any loan or finance application is can the client afford to take on this borrowing and repay over a time that fits into their financial make up, with evidence of affordability being provided by the customer but also being obtained via searches with third parties. In turn are there alternatives that are more cost effective and of less risk and financial burden that need to be considered and discussed.
What is Unaffordable Lending?
If a customer has expenditure that is greater than income then they are unlikely to be able to afford additional borrowing unless the finances are restructured and if appropriate lumped together into one pot streamlining any commitment.
If a client’s income and outgoings are not established, often with the use of specific details, bank statements, wage slips then there is no way of knowing what income a customer has and in turn their ability to repay any borrowing. The flip side is looking at a client’s expenditure, what are their monthly commitments, can any new borrowing fit snuggly into this or is it one commitment to far?
Can Car Finance be Mis-sold?
The simple answer is yes car finance can be mis-sold. How many times have you gone to a garage looking for a car, a second hand car maybe and end up walking away with a brand spanking new car, because, as the salesman puts it ‘it’s just so much cheaper looking at a new car than second hand’.
In fairness to the salesman they are absolutely right the way that car dealerships promote new cars as opposed to second-hand makes the purchase of the new car so much more appealing. However, that does not make it right, that does not make it affordable and that does not make it a good deal for you at the customer either in the short medium or long-term.
When you walk out of the car dealership with a new car regardless of the deposit and regardless of what the salesman said you’re basically renting the car for 2,3,4 or even five years for the amount being paid each month. Work that out and ask yourself could I have bought second-hand car for the same money and own it after that time? Probably yes.
What is PCP?
PCP or personal contract purchase is the main form of finance promoted by car dealerships. It is effectively a personal loan for car over a period of time normally around three years. The one main difference is that you will not be paying off the full value of the car and it is likely that you will not own the car at the end of the deal unless you choose to pay the final balloon payment. Effectively you are renting a car for the duration of the loan. You will not make money and if you wish to look at it in one way you won’t necessarily lose money although you will be paying this rental or lump payment for the duration of the contract.
Has your PCP Agreement been Mis-sold?
How do you know if your PCP agreement been mis-sold? The main problem with car finance is that the product being sold is not the car. You go into a car dealership to purchase a vehicle but invariably you come out with a financial product.
There are a number of areas as listed below where you can pin degrees of mis-sale, ultimately however it is the fact that car dealerships in essence have no interest in selling you a car that they date the be selling second-hand cars which are far cheaper. The essence of an effective dealership is to promote a loan product on the back of an aspirational vehicle that they wish you to take in exchange.
- Not the best option.
- The ownership of the vehicle was not explained.
- The commission element was not discussed.
- The payments were unrealistic
- The interest and charges of loan repayments were not explained
- No creditworthiness assessment
The Mis-selling Points of Motor Finance
When looking at potential mis-sale of any motor finance we look at a number of aspects all of which have been highlighted by the FCA as being in a number of situations unsatisfactorily dealt with by many car dealerships.
- Commission not explained.
- Contract not explained.
- Misled by numbers.
- Inadequate credit checks (creditworthiness assessment).
- High interest rate.
- Unfair charges and fines.
If you have had car finance in the past or it is still in the place and you feel for the reason that the areas as above were not discussed or were not dealt with in accordance with your own personal situation than there is an opportunity that the PCP finance was in fact mis-sold due to irresponsible lending practice.
What are Guarantor Loans?
Guarantor loans are simply personal loans that have been set up in order to encourage those who otherwise would not be able to raise finance through traditional banking applications to obtain finance. Loan amounts tend to be relatively small, running into several thousand pounds. Interest rates are very high due to the risk attached due to the borrower’s financial situation which does not support traditional personal borrowing.
The four most popular Guarantor loan companies are:
However, the one main difference is the loan itself is guaranteed by a third party. This third party could be a friend relative or even next door neighbour.
The lender therefore has the benefit of being repaid by the borrower or if not moving after the guarantor in order to seek repayment. This one area meant that the market almost as a whole turns a blind eye to the correct procedures in establishing whether lending is appropriate and affordable. Pushing these loans where there are 2 bites of the cherry regarding repayment and with the added benefit of very high interest rates being charged.
How can Guarantor Loans have been Mis-sold?
Guarantor loans can be mis-sold in a number of ways. The most common is the affordability aspect. In that the lender should understand the finances of the borrower and the ability for them borrower to be able to meet the financial commitment over the period of time that the financial commitment is taken. This information can be obtained by discussing the customer’s finances but also in obtaining information from third parties like credit reference agencies.
Unfortunately many of the lenders authorised loans with very little information relying on high interest rates to cover losses and the guarantors that the borrowers kindly brought on board.
Why are Guarantor loans Unaffordable?
Many of the guarantor loans were unaffordable because the customer’s finances were not looked at correctly. Did they have the income against expenditure to be able to afford the borrowing? When the borrower asked for more monies further down the line was the firm undertaking another review or did they just lend them some more money?
How do I know if I have been Mis-sold a Guarantor Loan?
There is not normally a clear answer as to whether a guarantor loan was mis-sold. Some were correctly provided but it does appear from studies by the FCA and what we are seeing that many of the guarantor loans were in fact incorrectly provided and checks for affordability not completed properly and therefore the loans were mis-sold.
This causes problems for the borrower also the third party namely the guarantor who also as a result of the poor lending practices was not provided with the protection, but they should have been in the application process of the borrowing.
- Incorrect checks.
- Numerous loans.
- Inadequate protection of the customers finances.
What is an affordability check?
An affordability check is the process of investigating whether an individual has enough income to make repayments on a loan. It will often involve looking at their earnings, outgoings and capital to see if they are able to afford the monthly payments. For example, when someone takes out a mortgage or applies for credit card borrowing it will be checked as part of the application process. In addition, lenders may also do an affordability check before agreeing any more lending – such as during a broker review or after making some enquiries with other lenders in order to assess how likely it is that they can provide funding to applicants who would otherwise have been turned down. Affordability checks should not be seen as negative assessment but rather are done purely from a risk point
How does an Affordability Check Work?
An affordability check is designed to assess whether a customer can afford the repayments on their loan. It will take into account all of your outgoings and incomings, including your disposable income, before deciding if you are eligible for a credit agreement. If you have any bad debt that needs paying off, an affordability assessment might be the key to getting them cleared up.
There are several factors which affect your eligibility – do you have a steady income? How much money do you owe? What kind of job do you have? How is your credit rating? These questions will help determine if borrowing from a lender is possible now or not. If a loan looks feasible, then a lender should proceed with an affordability check. This means evaluating your living expenses (rent/mortgage payments,loan repayments, utility bills etc) and comparing them with your current monthly income.
I Guarantee a Loan for Someone can I Claim?
This is an often overlooked part of any guarantor loan and the consequences of mis-sale. That is the effect on the provider of the guarantee. If as a guarantor you have provided a guarantee behind any form of loan facility where you have been called upon in order to make payments on a monthly basis or full repayment of the borrowing you to can look obtaining compensation and recovery of monies paid if a mis-sale has taken place.
This is completed independently of the borrower and it is your right as a guarantor to be able to make a claim against the loan company, which you absolutely have the right to do.
Did the business do everything right when lending?
In order to establish whether a mis-sales taken place for guarantor loans and car finance there are several aspects that need to be covered.
Did the lender complete reasonable and appropriate checks to satisfy itself that the borrower would not get into financial difficulty and would be able to repay the borrowing taken?
If reasonable and appropriate checks were completed was a fair and correct decision made?
If reasonable and appropriate checks were not carried out what would the correct checks have shown?
Bearing in mind the circumstances at the time of application should the lender reasonably realised it was increasing indebtedness and commitment that would have been harmful to the consumer?
Did the lender act unfairly or unreasonably in any other way?
Did the business undertake reasonable checks?
Whilst there are not a set list of questions for every lender to follow in order to establish borrowing mainly as a result of products being different there is still a requirement under law and regulation that good industry practice must follow for responsible lending and if necessary check further.
- A lower customers income.
- The longer term any loan.
- The greater frequencies of loan.
- Higher amounts to be repaid.
- Checking whether a borrower is vulnerable.
What Compensation to Expect?
If there has been a mis-sale of either a guarantor loan or car finance which is generally via PCP then the firm would normally have to look at putting the client back to position they would have been had the problem not have happened which can include a refund of interest and charges plus 8% simple interest.
The customer is not required to use the services of a firm which carries out regulated claims management activity to pursue their claim. Should someone wish to handle the complaint themselves, they will first need to lodge the complaint with the financial institution first before escalating to the Financial Ombudsman. It is possible for the customer to present the claim themselves for free, either to the person against whom they wish to complain or to the Financial Ombudsman or the statutory compensation scheme.