Car finance is an enormously popular way to own a car in the UK. Personal Contract Plans (PCPs) are now used for four in five new cars that are purchased and there are millions of these loans now in force in this country. However, some consumers have found that when the time comes to hand back the vehicle, if this is done via a voluntary surrender then there may well be some unanticipated additional finance on new cars

The mechanics of the PCP

The PCP is essentially a hire purchase agreement that enables someone without the cash to buy a car up front to borrow the money and repay in instalments. PCPs are structured around an initial deposit and a series of monthly payments that are made over three to four years. These monthly payments are calculated to cover the fall in value of the car as it ages. When the PCP contract comes to an end the car can either be purchased or it can be handed back without any additional cash to pay. If the car is to be handed back then it must be in decent condition and not have gone over the mileage limit.

What about voluntary surrender?

As it turns out, there is a third option for consumers with PCPs and it’s this that has somewhat muddied the waters. It is the “voluntary surrender” option that is causing the problem. This arises from the 1974 Consumer Credit Act, which enables a consumer who has made a purchase using a hire purchase agreement to hand back the item in question, as long as half of the contract has been paid up. This is a legal right that applies to anything obtained on hire purchase, including cars.

Where do the extra charges appear?

The Consumer Credit Act 1974 also says that a lender can apply additional charges if the consumer has failed to take reasonable care of the goods that are being voluntarily surrendered. In the case of a car it would probably be understandable if the lender applied an additional charge for a dented bonnet or stained interiors, as these would considerably impact on any resale value. But what about additional mileage? Currently, lenders are arguing that it is perfectly fair and reasonable – and legal – for additional charges, often in the hundreds of pounds, to be added on a voluntary termination where mileage on the car has gone over estimated totals. The justification for the charges is that mileage exceeding the set limit falls within the definition of failing to take reasonable care within the Consumer Credit Act.

What about the PCP contract?

What has prevented many consumers from making complaints about this in the past is the fact that virtually every PCP contract explicitly states that charges will be applied in this way. However, the point to note here is that a large number of experts have said that these clauses don’t stand because they are contrary to the Consumer Credit Act. Just because something is written into a contract doesn’t make it fair, reasonable or legal. And if a contractual term goes against the legislation then it could be found null and void.

What’s the practical situation?

It’s a difficult one to navigate. Currently, there are a number of consumers entangled with PCP lenders who have applied these charges and are looking to enforce them. Some have even applied them as missed payments that show up on credit ratings. However, legal experts still claim that these lenders have not got a leg to stand on, that actually they are ‘bluffing’ and should a case of this kind come before a judge – which it will do soon – the charges will be found to be unenforceable against consumers.

The reality is that PCP contracts are hugely popular, with consumers and also with lenders and manufacturers. However the voluntary surrender option is only popular with consumers because it often means the other parties lose money. Up until now lenders have used their own terms and conditions to enforce additional charges, for example for extra mileage. They have also relied on a lack of consumer knowledge about how legislation and contracts interact and the fact that few consumers have access to affordable legal advice. Now, we are beginning to see a stream of challenges and some could succeed. With respect to extra mileage it might be easy to see how 100,000 extra miles might indicate a lack of reasonable care. However, the charges are being applied to vehicles with much less – 7,000 in one case. Currently, there’s no clarity on these numbers, or anything else, but if there could well be in the coming months if one of these claims succeeds.

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