Concerns about irresponsible lending in car leasing deals has prompted the Financial Conduct Authority (FCA) to launch an investigation into the industry.
Over the past few years the amount of money being borrowed to buy new cars has grown exponentially.
Last year, 86% of new cars were bought on finance, according to figures by the Finance and Lending Association. Over £30 billion was borrowed in total in 2016 alone.
Now there are concerns that the industry isn’t regulating itself properly and could be rife with irresponsible lending.
As a result the FCA has announced it is going to investigate the car leasing market over concerns about lending practices.
“We are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry,” states the FCA.
“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.”
Poor lending practices
Back in 2014, new rules were brought in to govern lending practices in the mortgage industry after the financial crisis.
There are fears that reckless lending in the motor industry could lead to the next credit crunch as car dealers and finance firms perform minimal credit checks before lending people the money to buy a car.
A recent investigation by the Telegraph found some car dealers were encouraging buyers to commit their entire monthly disposable income to repayments on a car that was worth more than their entire salary.
One mystery shopper with a £400 a month disposable income was offered a Volvo V40 Cross Country costing £397 a month.
In a separate study, credit referencing firm Experian found that households with ‘stressed’ incomes make up a large number of the customers taking out car financing deals.
This raises concerns that too many people are being offered finance packages that they could quickly find unaffordable if their circumstances change.
Now there are increasing calls for a crackdown on car financing and for new rules to be put in place to make borrowers face the same level of stringent credit checks as they would if they were applying for a mortgage.
What the industry says
In response to the FCA investigation, Adrian Dally, head of motor finance at the Finance & Leasing Association, said the industry was “committed to responsible lending”.
He added: “We will continue to work closely with the FCA to ensure they have a good understanding of this highly competitive and diverse market.”