After his car payments forced him to endure years of juggling debts and having to take on extra work that strained his personal relationships, our client ‘Malcolm’ made a compensation claim on grounds of affordability and was awarded more than £10,000.
Malcolm entered into a hire purchase (HP) agreement to buy his vehicle, a BMW 3 Series, in 2018. The car was valued at £15,000 and the interest rate of the deal was 12.95% with the APR set at 24.3%. At the conclusion of the five-year repayment term, during which he was having to find an extra £461 each month, he had paid a total of £24,800 for the car.
Those five years proved to be truly arduous for Malcolm, however.
When he was agreeing the HP deal, he had outstanding loan and credit card debts, and was in arrears with the loan, having defaulted in the past. While he was told he had been subject to – and passed – a credit check, Malcolm was never asked for any bank statements or payslips to verify his income and expenditure. He recalls that, at no point, did the dealer make any attempt to consider if he could afford the HP deal. Instead, he was pressured into signing up for the five-year agreement.
During that time Malcolm’s financial situation worsened but he was unable to return the car as he needed it to get to work to earn money, creating a Catch-22 situation. He frequently missed making his payments and knew that falling behind on them would affect his interest rate and cost him more money in the long run.
As well as using any savings he had to try to keep up with the payments Malcolm, an engineer, had to borrow from family and friends, to avoid falling further into debt.
The anxiety and stress of trying to maintain his HP finance with his credit card and loan repayments and arrears had a catastrophic effect on Malcolm’s life. His mental health suffered and he frequently had to take on extra work away from home to earn some money to try to stay afloat and, in trying to make ends meet his relationships with his family and friends – and his then-partner – became strained.
Malcolm did finish paying off the BMW in 2023 and wondered if he would be eligible to make a compensation claim, based on the affordability – or otherwise – of his HP agreement. He spoke to Barings Law’s legal experts and signed up on a contingent fee basis, meaning he would not have to pay Barings Law’s legal fees unless and until he won his case, which allowed him to take action against the lender who had provided him with a finance package he couldn’t afford.
Barings’ affordability team put Malcolm’s concerns to the lender, arguing that the HP deal was unaffordable for him, given the outstanding debts he was already paying. Our initial letter of complaint claimed that an unfair relationship had been created by the lender, due to creditworthiness assessments not being carried out.
Under guidance from the Credit Consumer Sourcebook (CONC), lenders must take reasonable steps to determine whether the agreement was suitable for the customer. They must also consider the affordability risk to the customer, and whether they could maintain their payments:
- without having to borrow money from elsewhere;
- without failing their other financial obligations; and
- without the payments having a significant and adverse effect on the customer’s finances.
Malcolm did have to borrow money from third parties and used up what savings he had in order to keep up the repayments. The evidence available indicates that the HP deal wasn’t affordable for Malcolm, who maintained that the unfair relationship created did have a negative impact on him and his life.
CONC guidance also requires lenders and finance providers to make reasonable estimates – based on accurate assessments of their customer’s income and expenditure – of affordability. With only very basic enquiries made into Malcom’s financial history, his situation at the time, and his ability to sustain the extra payments each month the lender could not have obtained the necessary information that it is required to do when selling financial products.
The lender upheld Malcolm’s complaint without any need for the matter to be referred to the ombudsman and proposed a settlement whereby it would pay him £10,126.41*. This was broken down as £7,430.68 as a refund of the payments he had made towards the agreement, plus £2,695.73 for further interest (less 20% income tax).
Malcolm was happy to accept the payment as a full and final settlement of his complaint.
*Amount is before fees and disbursements
