Used car buyers are to be offered the low monthly payments usually seen on new car finance deals after the RAC launched a flexible loan that mimics PCP.
Similar to the hugely popular personal contract plan finance used to sell brand new cars, the RAC’s Flexiloan offers the chance to put a deposit down and get lower monthly payments over a set period thanks to a larger set deferred final payment.
It says that its product will help buyers of used cars aged between two and eight years at the time of purchase and the motorists confused by existing finance deals.
The RAC claimed that one in 10 motorists who take out car finance agreements have to hand their vehicle back early because they can’t afford the repayments – in some cases incurring huge financial penalties for terminating their agreement mid-way through the contract.
The RAC said many motorists are incurring big financial penalties and potential black marks on their credit ratings by terminating car finance agreements they can’t afford
That is just one of many pitfalls with car finance identified by the RAC that are ‘baffling’ UK car buyers.
The motoring organisation says it now wants to make finance easier for buyers, with what it claims is an industry first product, Flexiloan, offering the benefits of a PCP finance deal on used cars, but without the risk of unexpected fees at the end of the agreement.
The car buyer works out how much the vehicle they want to purchase will cost and how big a deposit they want to put down at a maximum of 25 per cent. They are offered the choice to borrow over a period between two and four years and change the size of the final payment.
The product is an unsecured personal loan and typical APR is quoted as 8.9 per cent, so it cannot match the interest-free or very low rate offers that some new cars can be promoted with.
But it offers ownership of the car from day one and no excess mileage payments, or penalty fees of any type that might rear their heads like they do at the end of a traditional PCP agreement.
Of all new cars registered by private buyers, eight in ten are now acquired using finance.
However, accusations of product mis-selling and signing off agreements knowing that customers won’t be able to afford the payments required has resulted in an industry-wide investigation by the Financial Conduct Authority.
An RAC-conducted survey of 400 motorists who took out car finance deals backed-up some of these concerns, revealing that a quarter of customers didn’t properly understand the differences between PCP (Personal Contract Purchase) and HP (Hire Purchase) products when they signed the paperwork for their new vehicle.
More concerning is that almost three in four (72 per cent) admitted they didn’t shop around for the best finance product, instead settling for the product recommended by the motor dealer.
That might be because many would not have been made aware that they could consider other options, with a quarter of customers saying they thought that the dealer was in more control of the process than they were, while one in five felt pressured by the showroom staff to agree to the finance terms.
As a result, more any more motorists are getting themselves into financial trouble because they can’t afford the repayments set by the deal.
WHAT ARE THE BENEFITS OF RAC FLEXILOAN?
· Choose from any car that is at least two years old on sale anywhere in the UK – you’re not tied to one specific manufacturer or dealer
· Easily see how changing one part of your payment affects other parts – complete transparency of what you’ll pay
· Full ownership of the car from day one
· No extra charges payable at the end of the finance period
· Know your interest rate via a quick ‘soft’ credit check which has no effect on your credit score
Almost half (45 per cent) of the respondents said they had to cut back on spending elsewhere to meet their monthly payments and six per cent had to work additional hours to earn enough to keep their vehicles.
Others simply couldn’t cope with the financial demands dictated by the monthly payments, with 12 per cent having to voluntarily terminate their agreements.
They could face big financial penalties by doing so if they exited their contracts before paying off more than half of the finance figure agreed.
In a bid to snatch the power from the hands of dealers and help consumers, the RAC says that Flexiloan ‘offers the sorts of benefits enjoyed by those used to popular PCP payment plans’ with the added bonus of being able to buy any car at least two years old.
Similar to a conventional car loan, the buyer is provided with funds upfront to pay for the vehicle of their choice outright.
And it doesn’t have to be from a dealer – the product can also be used to pay for a privately sold motor found on a classifieds website.
At the end of the agreement, customers can choose how to pay off the final lump sum – either in one go, re-finance what is remaining of the loan, or sell the car to cover the cost of the final payment.
The RAC says the Flexiloan product is similar to a traditional car loan in that you’re provided the money for the vehicle up front but allows the customer to tailor elements
Alastair Crossley of RAC Flexiloan said the new product will offer an alternative to popular PCP deals on new cars and provide a finance solution for those purchasing second-hand without the drawbacks of the personal contract purchase contracts, including their end-of-agreement charges.
‘We saw an opportunity to provide those looking for their next car with a radically different offering and one that puts them in complete control from beginning to end,’ Crossley said.
‘PCP is well-established within the new car market, with manufacturers always keen to offer deals to entice drivers – but it is in the much bigger used car market where we saw an opportunity to come up with a product that gives buyers so much more flexibility over how they pay for their vehicle, Crossley said.
Paul Went of Shawbrook Bank, who developed and provide the Flexiloan product in partnership with the RAC, said: ‘We saw a need in the used car market for a finance product that offers the benefits of traditional car finance products, such as PCP and HP, but gives the car owner the same control as taking an unsecured personal loan for their car purchase.’
How does it compare to a personal loan?
Personal loan rates are at an all-time low and those with a good credit rating can borrow for as little as 2.8 per cent.
M&S Bank offers the cheapest deal at 2.8 per cent on amounts between £7,500 to £15,000 repaid over up to seven years.
On a £10,000 debt repaid over 5 years you would pay £718.59 in interest with monthly repayments of £178.64.
You can find out more about the best deals in our guide to the top personal loans.
Remember though, those without a squeaky clean credit rating won’t be accepted for the most competitive rates so it is worth using a soft search tool which won’t leave a mark on your credit rating to find out what rates you are likely to be offered before you dive straight in.
Even those who get accepted may be offered a higher rate as loan providers only have to offer the advertised rate to 51 per cent of successful candidates.
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