Thousands of drivers would be unable to keep up their car payments in the event of an economic downturn, analysts have warned, prompting concerns about a mis-selling scandal.
With nearly 90 per cent of new cars sold using finance deals, the majority of which means the owner effectively leases their vehicle for three or four years instead of buying outright, some expert fear that many customers are not having the terms properly explained to them.
Making it clear that some borrowers could be paying too much for credit, the Financial Conduct Authority (FCA) launched an investigation into the car finance industry last month.
If the regulator was to decide that that the financial products had been mis-sold, dealers could be liable for millions in compensation. In the event of a financial downturn they could with a large number of returned second hand cars which would be difficult to sell.
“The culture of the business has to change and from the evidence I have seen there are some things going wrong,” Andrew Smith, a director at Compliancy Services, which advises dealers on the financial regulations, told The Times.
He added: “The majority of customers have no idea who their financing contract is with, even though the rules state the buyer has to know who they are dealing with, along with everyone else involved in the chain.
The FCA is not expected to complete its work until next year, but the regulator has warned it will “intervene” if it finds evidence of wrongdoing.
The Finance & Leasing Association (FLA) reported that in the 12 months to January 87 per cent of new car sales were funded by its members.
This has almost doubled in the last decade from 47.6 per cent in 2007.