Are cheap car loans the vehicle taking us to the next financial crash?
A decade ago it was sub-prime mortgages. Could it be sub-prime car loans this time? Cheap finance, the economic spectre of the age, has underpinned much of Britain’s growth over the past three years and there has been no bigger beneficiary of this debt-fuelled largesse than the car industry. But this four-wheeled binge, which reached a record £31.6bn in car loans last year, could have consequences if it veers off the road.
It takes just minutes to fill in the forms for a new kind of loan that cuts the cost of financing to levels that allow people on modest incomes to show up at the supermarket on a Saturday in the latest SUV (AtW's comment: how very dare they beat cash buyers!!!
). Applying takes no time at all, but the payback threatens to last a lot longer.
The car financing industry is confident that this new breed of ultra-low-cost loans, which account for 82% of all new car registrations and are known as personal contract plans (PCPs), are a safe and secure way of financing new cars. It says sub-prime lenders, who offer loans to people with erratic incomes and damaged credit ratings, account for only 3% of the market and the industry can cope with any destabilising events coming down the track.
Some experts are not so sure. There are worries that the volume of lending will be vulnerable to an increase in interest rates or rise in unemployment.
Bank of England economists writing in a blogpost entitled “Car finance – is the industry speeding?” argue that “the industry’s growing reliance on PCP has made it more vulnerable to macroeconomic downturns”.
There is also the concern that the banking industry, which provides much of the underlying finance, is offering the same platitudes as it did before the 2008 crash. The vast majority of loans are rock solid, it says, except the industry has failed to introduce a standard way to calculate customer arrears and repossessions, which means that the 3% sub-prime figure could be bigger.
The Finance & Leasing Association (FLA) – a trade body for consumer-credit and car lenders – cannot provide figures to support its assertion that lenders are following conservative credit guidelines. It says PCPs are sold responsibly and only to those people with a strong credit score, yet lenders’ credit scoring policies, which are relatively transparent in the US – the original home of the PCP – are secret in the UK.
Officials at the Financial Conduct Authority, the City regulator, have embarked on a review of lenders’ practices, including how they credit-score customers and the amount of checking that takes place of customer incomes and credit history.
Debt charities are on standby for a wave of distressed car buyers unable to honour deals that they will struggle to pay now that inflation is increasing strongly and their disposable incomes are shrinking. According to one observer, the industry is also vulnerable to the likely collapse in diesel car values, which could send many companies to the wall.
Simon Empson, who runs the online car broker Broadspeed.com, predicts a government clampdown on older diesel cars as part of plans to improve air quality in cities, which he says could have dire consequences for the trade.
Overall, the situation has been more than 10 years in the making, though the explosion in loans dates back to 2013 and the first signs of recovery from the 2008 crash. UK households borrowing last year to buy cars was up 12% on the year before. This year, the total borrowed is expected to exceed £40bn. Cash purchases are almost unknown, and a record 2.7m new cars were sold in Britain last year – the fifth year in a row of increasing sales. Of those, 1.3 million were diesels. The British are now buying more cars per head than any other large country in Europe.
PCPs have rocketed in popularity because they put in place a new way of calculating the loan. Instead of spreading the loan and interest charge over the whole cost of the car, only the cost of depreciation is taken into account. It means that some of the most expensive Mercedes, Audi, Volvo and Land Rover models, which maintain their value and depreciate the least, suddenly become affordable to those on lower incomes.
Deals are commonly priced over three years and can limit the loan on a £45,000 car to £20,000. The catch is that the seller retains ownership of the car and that the deal is essentially a lease. Customers can pay off the difference in a car’s value at the end of the deal or hand it back and start a new deal. More than 80% of PCP buyers roll over their contracts to a lease on a new car.
One industry executive said: “These days ‘ownership’ has given way to ‘usership’ in the car market.”
And it is this facility to continually upgrade, based on a new model of ultra-cheap financing, that has provided the industry with its biggest boost.
Click to continue to DOOM™: https://www.theguardian.com/business...ial-crisis-pcp
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DimPrawn Brexit DOOM™ ain't no prawn cocktail!
A decade ago it was sub-prime mortgages. Could it be sub-prime car loans this time? Cheap finance, the economic spectre of the age, has underpinned much of Britain’s growth over the past three years and there has been no bigger beneficiary of this debt-fuelled largesse than the car industry. But this four-wheeled binge, which reached a record £31.6bn in car loans last year, could have consequences if it veers off the road.
It takes just minutes to fill in the forms for a new kind of loan that cuts the cost of financing to levels that allow people on modest incomes to show up at the supermarket on a Saturday in the latest SUV (AtW's comment: how very dare they beat cash buyers!!!
). Applying takes no time at all, but the payback threatens to last a lot longer.The car financing industry is confident that this new breed of ultra-low-cost loans, which account for 82% of all new car registrations and are known as personal contract plans (PCPs), are a safe and secure way of financing new cars. It says sub-prime lenders, who offer loans to people with erratic incomes and damaged credit ratings, account for only 3% of the market and the industry can cope with any destabilising events coming down the track.
Some experts are not so sure. There are worries that the volume of lending will be vulnerable to an increase in interest rates or rise in unemployment.
Bank of England economists writing in a blogpost entitled “Car finance – is the industry speeding?” argue that “the industry’s growing reliance on PCP has made it more vulnerable to macroeconomic downturns”.
There is also the concern that the banking industry, which provides much of the underlying finance, is offering the same platitudes as it did before the 2008 crash. The vast majority of loans are rock solid, it says, except the industry has failed to introduce a standard way to calculate customer arrears and repossessions, which means that the 3% sub-prime figure could be bigger.
The Finance & Leasing Association (FLA) – a trade body for consumer-credit and car lenders – cannot provide figures to support its assertion that lenders are following conservative credit guidelines. It says PCPs are sold responsibly and only to those people with a strong credit score, yet lenders’ credit scoring policies, which are relatively transparent in the US – the original home of the PCP – are secret in the UK.
Officials at the Financial Conduct Authority, the City regulator, have embarked on a review of lenders’ practices, including how they credit-score customers and the amount of checking that takes place of customer incomes and credit history.
Debt charities are on standby for a wave of distressed car buyers unable to honour deals that they will struggle to pay now that inflation is increasing strongly and their disposable incomes are shrinking. According to one observer, the industry is also vulnerable to the likely collapse in diesel car values, which could send many companies to the wall.
Simon Empson, who runs the online car broker Broadspeed.com, predicts a government clampdown on older diesel cars as part of plans to improve air quality in cities, which he says could have dire consequences for the trade.
Overall, the situation has been more than 10 years in the making, though the explosion in loans dates back to 2013 and the first signs of recovery from the 2008 crash. UK households borrowing last year to buy cars was up 12% on the year before. This year, the total borrowed is expected to exceed £40bn. Cash purchases are almost unknown, and a record 2.7m new cars were sold in Britain last year – the fifth year in a row of increasing sales. Of those, 1.3 million were diesels. The British are now buying more cars per head than any other large country in Europe.
PCPs have rocketed in popularity because they put in place a new way of calculating the loan. Instead of spreading the loan and interest charge over the whole cost of the car, only the cost of depreciation is taken into account. It means that some of the most expensive Mercedes, Audi, Volvo and Land Rover models, which maintain their value and depreciate the least, suddenly become affordable to those on lower incomes.
Deals are commonly priced over three years and can limit the loan on a £45,000 car to £20,000. The catch is that the seller retains ownership of the car and that the deal is essentially a lease. Customers can pay off the difference in a car’s value at the end of the deal or hand it back and start a new deal. More than 80% of PCP buyers roll over their contracts to a lease on a new car.
One industry executive said: “These days ‘ownership’ has given way to ‘usership’ in the car market.”
And it is this facility to continually upgrade, based on a new model of ultra-cheap financing, that has provided the industry with its biggest boost.
Click to continue to DOOM™: https://www.theguardian.com/business...ial-crisis-pcp
--------
DimPrawn Brexit DOOM™ ain't no prawn cocktail!
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