City watchdogs could ban 'irresponsible' car loans in new investigation

Katie Morley
At present, other than passing basic credit checks, drivers can take out deals worth hundreds of pounds a month without proving they can afford to make repayments  - Michael Bodmann

"Irresponsible" car loans will be probed by the City watchdog amid suggestion that drivers could soon be made to pass mortgage-style affordability tests before leasing new motors.

The Financial Conduct Authority has announced that it is conducting a study of the car lending market to establish whether firms should perform tougher checks on drivers before letting them sign up for deals.

At present, other than passing basic credit checks, drivers can take out deals worth hundreds of pounds a month without proving they can afford to make repayments.

It comes amount of money being borrowed to buy new cars has trebled over the past eight years to more than £30 billion, following a huge boom in cheap "pay monthly" deals. 

In a Telegraph mystery shopping exercise a customer with £400 a month disposable income was offered a Volvo V40 Cross Country for £397 a month  Credit: Volvo V40 Cross Country

Fears are mounting the trend could cause the next financial crash, with Bank of England economists warning the industry could be "speeding" towards a potential "economic shock" if people are left unable to meet their repayments. 

Last week an investigation by the Daily Telegraph found car salesmen encouraging customers to spend their entire disposable income on "pay monthly" deals for cars worth more than their entire salary.

Separate data from Experian, the UK's biggest credit lender, has also established that households with "stressed" incomes are a major force behind the rise in "pay monthly" car purchases, raising cause for concern.

Responding to the findings experts called for tighter checks and said it was "essential" that all lenders – including car financiers – carry out stringent affordability checks before granting credit.  Jane Tully, director of external affairs at the Money Advice Trust, said: "Car finance and consumer credit more generally is booming, and the Bank of England is right to be concerned."

In 2014 the FCA introduced more stringent affordability checks for homebuyers and re-mortgagors over fears they were overstretching themselves to get a foot on the property ladder.

The change meant would-be borrowers were asked to give extra details about their spending, such as how much they spend on clothes and going out.

It is now expected that the same type of checks could eventually be applied to car loans.

In a document published yesterday the FCA said: "We are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry. 

"We will conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance."

Adrian Dally, head of motor finance at the Finance & Leasing Association which represents car loan providers said: “The motor finance industry is committed to responsible lending and to high standards of customer service. We will continue to work closely with the Financial Conduct Authority to ensure they have a good understanding of this highly competitive and diverse market.”

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