ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.
The coverage of the ombudsman service was extended in April 2007 to include all regulated consumer credit activity. Since then we have seen a steady increase in the number of complaints made to us about car finance. Most of these complaints concern hire purchase, although some involve leasing agreements or loans taken out through car dealers.
We are able to consider complaints about car dealers as well as those about credit or hire businesses – but only in relation to their consumer credit activities. For dealers, that will usually be credit broking; for the credit or hire businesses it will be hire purchase, lending or leasing. Hire purchase is a type of financial arrangement where the consumer makes a monthly repayment for a set period of time, during which the car remains the property of the hire purchase business. At the end of the period, the consumer can either hand back the car, or pay a further lump sum (often called a "balloon payment") to buy the car outright.
Consumers frequently find the technicalities of hire purchase transactions confusing. Typically, they believe they simply went to a dealer and bought a car with the aid of credit, when what actually happened is rather different:
Hire purchase agreements are covered by the Supply of Goods (Implied Terms) Act 1973. This says there are implied conditions in a hire purchase agreement, including a condition that the goods will be of satisfactory quality and will be fit for purpose. (Implied conditions are those that can be assumed to be included in the agreement, even if they do not actually appear in writing.) So where a consumer has a complaint about faults in a car that was bought by means of a hire purchase agreement, we can consider the complaint if it has been made against the hire purchase business. We are not able to pursue such complaints if they are made against the dealer. This is not just because the selling of cars is not a consumer credit activity but because, under a hire purchase agreement, the dealer does not sell the car to the consumer. In our experience, some businesses encourage consumers to complain to the dealer in these circumstances, which adds to the consumer’s confusion. This is what happened in case 79/4 below.
Another form of car finance that features fairly regularly in the complaints we see is the type of loan that is often called a "fixed-sum loan". Here the dealer acts as a credit broker and – at the time of the sale – arranges the loan for the buyer from a separate business – the lender. The lender pays the proceeds of the loan direct to the dealer and the consumer makes regular repayments to the lender.
When this type of loan is used to buy the car, then under Section 75 of the Consumer Credit Act 1974 the lender may, in some circumstances, be equally liable with the dealer if something is wrong with the car. Most commonly, that will be where the dealer seriously mis-describes the car, or where the car has faults of a kind that amount to a breach of contract by the dealer. Even where the car is second-hand, it must still be safe and in appropriate condition for its age and price – as we see in case 79/2.
In these sorts of cases, we will explain to the consumer that the complaint must be brought against the business that provided the hire purchase or fixed-sum loan, and that is therefore responsible for the quality of the car provided (under the hire purchase agreement – or through Section 75 if the credit was a fixed-sum loan).
Lenders and hire purchase providers are sometimes reluctant to look properly into a consumer’s complaint about faults in a car, and prefer to take the dealer’s word for it that the car was in good condition when it was supplied. However, we would expect them to take reasonable steps to satisfy themselves in the matter, before they decide whether or not to uphold a consumer’s complaint.
Sometimes the complaint is about the activity of credit broking, and so is properly brought against the dealer. As car dealers are covered by us when they carry out credit broking, they need to be prepared to answer our questions about any complaints that are brought to us.
Where we uphold a consumer’s complaint, we are able to consider a range of potential measures when deciding on an appropriate settlement. These could include refunds, compensation, replacement vehicles or the early termination of a credit agreement, without charge. Our aim is to bring about an outcome that does justice to the individual case, taking account of what each party did (or failed to do).
Consumers, as well as consumer credit businesses, should take care to act reasonably during the dispute. Hiding or abandoning the car, or damaging it, for example, will just make a difficult situation worse (as in case 79/3).
As always, it is important for businesses to keep proper records in case a complaint is made against them. The business complained about in case 79/5 was able to produce contemporaneous photographic evidence to support its claim that the car had been damaged. This was particularly helpful in enabling us to make our own independent assessment of the nature of the damage.
The following case studies illustrate some of the complaints that we have dealt with recently involving car finance.
A call-centre supervisor, Miss Q, obtained a brand-new hatchback with the help of hire purchase arranged by the car dealer. Only a couple of weeks after taking delivery of the car, she found that a significant amount of rainwater had leaked through the roof. She took the car back to the dealer, who repaired it and returned it to her the following day.
Unfortunately, the problems with the roof continued. Miss Q returned the car for repairs on five more occasions over the next three months. On the final occasion, the dealer kept the car for nearly a month before returning it to her.
By then, she had given up hope that the problem would ever be resolved. She wrote to the hire purchase business and said it appeared to be impossible to obtain an effective – and permanent – repair to the roof. As she had already given the dealer "a fair chance to put things right", she felt she was now "entitled to cancel the agreement and hand the car back".
Initially, the hire purchase business responded by telling her it was unable to help as it was "a finance company, not a garage". After she had pursued the matter for some weeks, it eventually told her it was prepared, "as a goodwill gesture" to liaise between her and the dealer to help her get the car repaired. Miss Q did not think this an acceptable option, but the hire purchase business refused to discuss the matter further. She then brought her complaint to us.
We were satisfied, from the reports the dealer had provided, that there was a substantial and seemingly irreparable problem with the roof of the car. We agreed with Miss Q that a fault of this nature was unacceptable in a brand-new car – and that she had given the dealer ample opportunity to try to correct the fault.
We pointed out to the hire purchase business that, under the hire purchase agreement, it (rather than the dealer) was the provider of the car – and was therefore responsible to Miss Q for the quality of the car.
In our view, the facts of this case justified Miss Q being released from her liability under the hire purchase agreement. So we said the hire purchase business should cancel the agreement and arrange to collect the car from Miss Q.
The faulty roof and the frequent need for repairs meant that her use of the car had been limited and far from trouble-free. So we said the hire purchase business should retain just £50 from each of the monthly repayments Miss Q had made. It should return the rest of the money to her, plus interest. We said it should also pay her £200, in recognition of the inconvenience caused by its poor handling of her complaint.
A retail manager, Mr B, bought a six-year-old car with the aid of a fixed-sum loan, arranged by the car dealer. Within two days of taking the car home, he discovered that neither the fuel gauge nor the speedometer were functioning properly and the cooling fan did not work at all. He therefore returned the car to the dealer for repairs.
Very shortly after getting the car back, Mr B had to take it for further repairs, as there was a problem with one of the pedals. And a few weeks after that, he found that water had leaked into the driver’s foot-well area – and the fuel gauge and speedometer had broken again.
After that, a problem developed with the front brake discs and the fixings for the driver’s seat. The dealer arranged for a mechanic to collect the car from Mr B and take it away for repairs. But an hour before the mechanic was due to arrive, Mr B rang him to say the car would have to be towed away, as it would be too dangerous to drive it. He had noticed a strong smell of petrol inside the car – and petrol had leaked on to his driveway.
It was over three weeks before the car was eventually repaired and returned to Mr B. For a short while all appeared to be well. However, while the car was having its MOT inspection at an independent garage, an electrical burning smell was detected in the engine compartment, so the inspection had to be abandoned.
By then, it was nearly six months since Mr B had bought the car. Its existing MOT certificate would shortly run out. He had lost faith in the dealer’s ability to carry out lasting repairs. And although the dealer had offered to exchange the car for another used car of similar value, Mr B was unwilling to take the risk that a replacement car might turn out to be of a similarly poor quality.
He told the lender he wanted to return the car and cancel the loan agreement. However, the lender said that this was not possible and that any problems with the car were "down to the dealer to sort out". Mr B then came to us.
We were satisfied, from the evidence Mr B provided, that the car had significant defects which the dealer had failed to put right within a reasonable period of time. In the particular circumstances of this case, we accepted that it was reasonable for Mr B to have refused the dealer’s offer to exchange the car for another used vehicle.
We accepted the lender’s view that "some issues" might be expected to come to light with a second-hand car of this age. However, it seemed to us that the "issues" in this case went beyond what Mr B might reasonably have expected to encounter, given the car’s age and price.
The car would not obtain an MOT certificate in its current state. The problems had started to become apparent very shortly after Mr B had bought the car – and they were well-documented. So it seemed likely that the car had been faulty at the time it was sold – and that there had therefore been a breach of contract.
Because of the type of loan he had taken, Mr B was able (under Section 75 of the Consumer Credit Act 1974) to claim against either the dealer or the lender for the breach of contract.
That meant the lender was liable for Mr B’s losses in the matter. We said it should release him from the loan agreement and that – for each month when the faults had prevented him from using the car – it should refund his repayment. We said the lender should also pay Mr B £200, in recognition of the inconvenience caused by its poor handling of the complaint.
Mr G’s local car dealer arranged hire purchase to enable him to buy a two-year-old used car. Three months later, Mr G told the dealer that the car kept breaking down, so he wanted to return it and cancel the hire purchase agreement.
The dealer insisted that it was unable to help, as there was nothing wrong with the car. Mr G then decided to cancel the direct debit for his monthly hire purchase payments.
The hire purchase business contacted him a few weeks later to ask why he had missed a payment. He said he was not prepared to continue paying for a "faulty car" and that he would hand it back as soon as the hire purchase agreement was cancelled.
The hire purchase business said that – as a first step – it would get the car inspected to establish exactly what was wrong with it. But Mr G was adamant that the agreement must be cancelled before he would hand over the car to anyone.
The business again explained that it could not know how best to proceed until the car had been inspected. Mr G then locked the car in a friend’s garage. He later told us this was to ensure the hire purchase business would not be able to find the car if it tried to take it away.
Unable to reach any agreement with the business, Mr G eventually brought his complaint to us.
complaint not upheld
Mr G told us that as he was "not particularly knowledgeable about car engines" he could not tell us exactly what was wrong with his car. And although he gave us a list of the dates when he said the car had broken down, he was unable to offer any evidence to back this up. He said he had not used a breakdown service but, on each occasion, had arranged for a friend to help him out by towing the car home.
We thought the hire purchase business had acted reasonably in saying it needed to get the car inspected before it could decide how to proceed. Mr G had not helped the situation at all by refusing to cooperate with such an inspection and by then moving the car to an undisclosed address.
We saw no evidence that he had been provided with a faulty car, and he was unwilling to allow anyone to inspect it. So we said there did not appear to be any reason why he should be released from the hire purchase agreement.
We did not uphold the complaint. We told Mr G he should consider carefully the potential consequences of keeping the car hidden and continuing to withhold his payments.
A trainee hairdresser, Miss W, took out a fixed-sum loan so she could buy a three-year-old used car. While she was driving the car home after collecting it from the dealer’s, she heard a loud noise in the engine and then noticed a large quantity of black smoke coming from the exhaust.
She took the car straight back and was assured by the dealer that all would be well once he had arranged for the fuel injectors to be cleaned.
Initially, this seemed to solve the problem but a few weeks later the car broke down altogether. Rather than going back to the dealer, Miss W had the car assessed by a local garage. She was told that new fuel injectors were needed, at a total cost of around £1,500.
When she asked the lender if it would pay for this work, it said it would first have to arrange its own inspection of the car. This was carried out several weeks later and confirmed the need for new fuel injectors. However, the lender told Miss W not to get the car repaired before it had obtained the dealer’s comments on the car’s condition.
Over the next few weeks, Miss W rang the lender at regular intervals to ask what was happening. Each time, the lender said it was still waiting to hear from the dealer. Miss W made several attempts to contact the dealer herself, but her calls were never returned.
Eventually, she sent the lender a letter of complaint. She said that travelling to and from work was difficult and expensive without the use of her car. She did not want to delay the repairs any longer – but could not afford to pay for them herself unless the lender confirmed that it would refund the cost of the work.
The lender said it was unable to comment until it heard from the dealer. Shortly after that, the dealer rang Miss W, offering to exchange her car for one that he said was of a similar age and value and had only just come into his showroom.
Miss W wanted to keep her existing car but to have it properly repaired. The dealer told her that was not an option. And when she contacted the lender, it said it was not prepared to pay for repairs as she had now been offered an alternative car.
Miss W then complained to us about both the lender and the dealer.
We told Miss W that we would only be able to look into a complaint about the dealer if it concerned his regulated consumer-credit activities. The relevant activity in this case was credit-broking – but there was no suggestion that the dealer had done anything wrong when arranging Miss W’s loan.
We were, however, able to look into her complaint against the lender because the type of loan she used to buy the car meant she was covered by Section 75 of the Consumer Credit Act 1974.
It was clear, from the inspections that both Miss W and the lender had commissioned, that the car had been sold with a major fault.
We contacted the lender and explained why, given the circumstances of this case, we thought it should pay to have the car repaired. It agreed to do this, and to give Miss W £500 to cover her out-of-pocket expenses and compensate her for the inconvenience she had been caused.
Mr D leased a sports car under a three-year regulated consumer hire agreement, which allowed him to drive the car for up to 8,000 miles each year. One of the conditions of the lease was that he was liable for the cost of any damage to the car beyond "normal wear and tear".
When the lease period came to an end, he returned the car to the leasing business with 18,162 miles on the clock – well under the maximum mileage he was allowed.
Soon afterwards, the business sold the car at auction (as is usual practice). It then asked Mr D to pay £177.50.
This was the estimated cost of repairing damage that it said had been caused to the car while Mr D had the use of it.
Mr D refused to pay. He told the business that the low mileage on the car when he returned it should "more than make up for any defects the car might have had".
He denied that the car had sustained any damage beyond what could be considered "normal wear and tear over a three-year period". And he said that, in any event, the business had left it too late to expect him to pay, as it should have had the car repaired before sending it to auction.
complaint not upheld
The leasing business sent us the photographs it had taken of the car when Mr D returned it. These clearly showed a large rip to the fabric of one of the seats, as well as a cut on the near-side rear tyre.
After referring to the guidelines on fair wear and tear produced by the British Vehicle Rental and Leasing Association (BVRLA), we said the business was right to say the damage to the car could not be regarded as "normal wear and tear".
The business provided evidence that £177.50 represented a fair estimate for the cost of the repair work. We did not agree with Mr D that his low mileage would "off-set" the cost of any damage. Nor did we accept his view that – in putting the car into the auction before getting it repaired – the business had "forfeited its right" to pass on the cost to him.
Under the leasing agreement, Mr D was liable to pay the cost of the damage in question – and it was immaterial whether these repairs were carried out before or after the car went to auction. We did not uphold his complaint.