BoE investigates 'terrifying' rise in borrowing to fund new car purchases

[Sancho Panza]

Telegraph 14/4/17

'Drivers may face tougher affordability checks to qualify for car loans amid fears of a new financial crisis triggered by pay-as-you-drive deals.

The amount of money being borrowed to buy new cars has trebled over the past eight years to more than £30bn and there are growing concerns over the lack of financial checks made on potential borrowers.

Motorists can be offered loans worth more than their own salaries in a growing scandal which has echoes of the sub-prime mortgage boom which helped spark the global financial crisis.

Last night the Bank of England confirmed it is investigating car financing arrangements which could lead to regulators enforcing tougher affordability tests, potentially similar to those used on mortgages.

Nine in ten new car sales are now financed by "personal contract plans" which can enable people on low incomes and poor credit histories to afford brand new top-of-the range cars. 

Drivers pay a small upfront fee and then a monthly "rental" before handing back the vehicles and upgrading after several years. The popularity of the finance schemes has soared in recent years.

The Daily Telegraph has seen figures indicating that households with "stressed" incomes are a major force behind the rises, with a 54 per cent increase in applications since 2014.

 

It follows previous predictions by Bank of England economists the industry could be "speeding" towards a potential "economic shock" if people are left unable to meet their repayments and the value of cars falls as a result.The value of car loans in the UK almost trebled to £31.6bn between 2009 and 2016 according to the Leasing and Financing Association.

Some of the car-leasing loans have been packaged into investments called "asset-backed securities" and sold on to investors such as pension funds. 

Falls in the value of this type of investment were a major reason behind the 2008 financial crisis. However this time the investments are backed up by cars instead of houses. 

If people are no longer able to pay the loans en masse then the value of the assets can plummet in value, leaving the financial institutions holding the investments worse off.The Bank of England said it could not reveal the extent of the banking system’s exposure to finance subsidiaries of car manufacturers for regulatory reasons.

A spokesman insisted the financial system is safer than it was before the crisis. Capital requirements, the amount of reserve money held by banks, is now ten times higher than it was before the crisis, it said.

Data obtained by the Daily Telegraph reveals the demand for car loans is rising fastest among low income groups whose finances are stretched and who are most likely to be hit by a sudden downturn in the economy.

The number of applications for a type of car plan called "personal contract purchase" by people classed as having "stretched finances" has increased by 54pc over the past two years, a database provided by the UK's biggest credit checking agency Experian shows.

Consumers deemed to have stretched finances tend to have low incomes, unstable jobs, little savings and are often reliant on state housing or benefits, the firm said.

[Si1]

 

[Greater Fool]

I've said this before, as the Millennials and Gen X and Y are priced out of the housing market the bankers will try and push car loans, they can't expand student loans debt anymore as everyone who can go to university is. Its just Idiotic really, when I look on Auto Trader I can get a good 2nd hand Audi, Beemer or Merc for a fraction of the cost of a new one.

[Errol]

At least with the crack team of Bank of England investigators on the case we can be sure that everything will be cleared up satisfactorily. They have such an amazing track record and I trust them completely.

[Greater Fool]

18 minutes ago, Sancho Panza said:

Consumers deemed to have stretched finances tend to have low incomes, unstable jobs, little savings and are often reliant on state housing or benefits, the firm said.

Nice to hear that my taxes are being used to fund a tax credits purchased German Wunderbar machine.

[Greater Fool]

3 minutes ago, Errol said:

At least with the crack team of Bank of England investigators on the case we can be sure that everything will be cleared up satisfactorily. They have such an amazing track record and I trust them completely.

We can sleep soundly tonight as Carney remains vigilant.

[Greater Fool]

16 minutes ago, Si1 said:

 

On my walk home form work I am passed by countless young Princesses in new or nearly new black and white Audis that I couldn't even afford to buy now, never mind 20 years ago when I was their age.

[darkmarket]

It's like they get printed issues of zerohedge delivered with a six-month delay.

[Ah-so]

If you want to pick up a good value 2nd hand used car, 2018 will be a great time to buy - a load of ex-PCP cars should be flooding onto the market, depressing prices. 

[Venger]

Daily Mail (yesterday) had big headline about a coming squeeze in lending for credit cards and personal loans, but it may just be bluster.  

(BELOW)

Although there was a post the other day about a HPCer having letter reducing his CC limit.

It's also new car galore around here.  Driveway upon driveway with 2014-2016 German SUVs.   So many standard 40s-60s semis that have been given a facelift GD windows and door to the frontage.  

Although I have 2014 mid-size car and easy access to a really nice German marque car.

 I will defend those who want to buy new cars.  It's their choice.  No one is stopping them looking in Autotrader, taking a smaller loan, rather than go to buy brand new at dealership.)

Quote

 

Pablosammy said:
PCP isn't inherently evil, although evil people often use it to pull the wool over the uninitiated's eyes.

As long as you do the sums, work out the total cost of ownership, and compare it against other available finance options, it's a perfectly valid way of owning a car. It's just a finance product, ultimately, and a relatively simple one at that.

Yes, of course a £3k used Fiesta is cheaper to own than a C Class Merc on PCP, but some people don't mind paying more for a bit of luxury and a warranty. They're not idiots, they're not uninformed, they just made a different choice. The self-righteousness on here can be suffocating at times.

 

 

Quote

 

Banks finally plan credit crackdown: Lenders set for biggest squeeze since the financial crisis over fears of a dangerous debt bubble
High Street banks intend to reduce the number of credit cards they will offer
The banks have suggested that they will impose stricter affordability checks
It will be the biggest squeeze on lending since the financial crisis happened

By James Salmon, Business Correspondent For The Daily Mail
PUBLISHED: 23:06, 13 April 2017 | UPDATED: 23:07, 13 April 2017

http://www.dailymail.co.uk/news/article-4410514/Lenders-set-biggest-squeeze-financial-crisis.html

 

 

[Father Fred]

Two totally separate issues.  People making life choices that I wouldn't.  Not ideal but its their life.  Secondly the possibility of damage to financial insitutions... that possibility clearly needs addressing.  Won't happen sensibly under the tories.

[Money Frugality]

3 hours ago, Tiger131 said:

I've said this before, as the Millennials and Gen X and Y are priced out of the housing market the bankers will try and push car loans,

 

Dont be a fool it's everyone of all ages & incomes buying finance cars! It's just how obvious it is that it's been financed. 

 

On topic I've been posting about this for ages, the quicker it all blows up the better used cars/bikes are having their prices held artificially high by secondary sales financed. Auto trader stock may be worth a punt with the glut of off finance cars ready to hit the market soon. Pay up front to advertise fortnightly I believe their model is. It's on my watchlist for 2018 . 

[Noallegiance]

7 hours ago, Sancho Panza said:

 

If people are no longer able to pay the loans en masse then the value of the assets can plummet in value, leaving the financial institutions holding the investments worse off.

 

Yet again, the subject for protection are the banks, not the people.

[stuckmojo]

My wife just passed her test (at the ripe old age of 34) and we went looking for a new car. 

I did some math on the PCP deals and they are a complete rip off. Insanity, actually, with a lot of strings attached. I now understand how joe bloggs next door can afford a new Mercedes whilst working in a call centre. He can't, and he's basically renting it for 350£ per month.

I ended up buying a 1 year old car for 60% of the new price (car is immaculate and with 3 years residual warranty). 

Also, the PCP typical interest rate is insanely high if you want to borrow, versus a bank loan for 3% or so. 

It's the next mis-selling scandal. 

[CHF]

12 minutes ago, stuckmojo said:

My wife just passed her test (at the ripe old age of 34) and we went looking for a new car. 

I did some math on the PCP deals and they are a complete rip off. Insanity, actually, with a lot of strings attached. I now understand how joe bloggs next door can afford a new Mercedes whilst working in a call centre. He can't, and he's basically renting it for 350£ per month.

I ended up buying a 1 year old car for 60% of the new price (car is immaculate and with 3 years residual warranty). 

Also, the PCP typical interest rate is insanely high if you want to borrow, versus a bank loan for 3% or so. 

It's the next mis-selling scandal. 

The risk is as what happened to my mate is that your fully owned car with a book price of around 12k ends up needing an 8k repair! Hes now got a Kia on PCP as he couldnt face that again and its hard to blame him. 

[nome]

6 hours ago, Ah-so said:

If you want to pick up a good value 2nd hand used car, 2018 will be a great time to buy - a load of ex-PCP cars should be flooding onto the market, depressing prices. 

This should already be the case given the length of time these various lease/pcp deals have already been going for and yet it's not happening, the secondhand price for most 3 year old cars is as high as it's ever been. This glut of ex lease cars seems to be being deliberately prevented from hitting the used car market

I'm hearing accounts of closed 'invite only' auctions for 3 year old ex pcp cars where hundreds at a time get sold off, also places like Bruntingthorpe where thousands of them are sat.

 

I honestly wouldn't be surprised if it even turns out that manufacturers are scrapping 3 year old ex lease cars just to keep the market artificially high.

[Ah-so]

12 minutes ago, nome said:

This should already be the case given the length of time these various lease/pcp deals have already been going for and yet it's not happening, the secondhand price for most 3 year old cars is as high as it's ever been. This glut of ex lease cars seems to be being deliberately prevented from hitting the used car market

I'm hearing accounts of closed 'invite only' auctions for 3 year old ex pcp cars where hundreds at a time get sold off, also places like Bruntingthorpe where thousands of them are sat.

 

I honestly wouldn't be surprised if it even turns out that manufacturers are scrapping 3 year old ex lease cars just to keep the market artificially high.

The cyclical dip in prices is expected next year and should continue into 2019. The number of ex PCP coming onto the market then will grow from current levels. 

And while it sounds like a plausible theory that the manufacturers are deliberately scrapping old vehicles, they would take a huge loss. The PCP deals appear to be good value and the pricing is predicated on being able to sell the asset at the end of 5 years. 

[stuckmojo]

1 hour ago, CHF said:

The risk is as what happened to my mate is that your fully owned car with a book price of around 12k ends up needing an 8k repair! Hes now got a Kia on PCP as he couldnt face that again and its hard to blame him. 

Agreed, hence I bought a car with a manufacturer's warranty. 

[Ah-so]

7 minutes ago, stuckmojo said:

Agreed, hence I bought a car with a manufacturer's warranty. 

I can't face those huge repair bills either, so I buy Toyotas. But if I wanted a French or German car, I would definitely want a warranty. 

[Lord D'arcy Pew]

What would be the consequences of a mass default on PCP loans?

Would the cars be taken away by bailiffs on the back of a low loader, would the previous keeper be able to get to work? 

[Bruce Banner]

These days it's difficult to find out the purchase price of a new car, all pricing is in pounds per month. When you do find out the only way to get a discount is to take out finance and cancel it after a month. Car dealers definitely dislike outright purchases.

[stuckmojo]

Just now, Bruce Banner said:

These days it's difficult to find out the purchase price of a new car, all pricing is in pounds per month. When you do find out the only way to get a discount is to take out finance and cancel it after a month. Car dealers definitely dislike outright purchases.

Yes, because almost all car manufacturers have a finance arm. Dealers and manufacturers make more money from the arbitrage in borrow vs lend rates. 

For the average buyer, the car really is a financial product. Or should I say - financialised.

 

 

[Lord D'arcy Pew]

Dunstan and Dudley will always take a good cash offer.

 

Spiv's in the motor trade, never!

 

 

Edited April 15, 2017 by Lord D'arcy Pew
Added Content

[Ah-so]

10 minutes ago, Lord D'arcy Pew said:

What would be the consequences of a mass default on PCP loans?

Would the cars be taken away by bailiffs on the back of a low loader, would the previous keeper be able to get to work? 

The consequence is that there would be mass repossessions and a lot of cars flooding onto the market. 

There are relatively low default rates - people do not want to lose their cars. They will default on credit card debt first.

I really don't know about how they would get to work if repossessed. Take the bus? 

[Lord D'arcy Pew]

36 minutes ago, Ah-so said:

The consequence is that there would be mass repossessions and a lot of cars flooding onto the market. 

There are relatively low default rates - people do not want to lose their cars. They will default on credit card debt first.

I really don't know about how they would get to work if repossessed. Take the bus? 

My understanding was that these loans originated in the States, they moved from sub-prime house loans to sub-prime car loans because of regulation.

The thinking behind the new get rich quick scheme was that the borrowers would not default on the car payments as they would then be without a means to get to work.

You could be right, they may well default on all their other debts first, and bring down the rest of the economy. But this would still hit them in the end, just like sub-prime housing defaults. The debt merry-go-round just keeps on spinning. They send their wooden wonders off, convinced it's a sure fire winner in the financial derby, it later returns. They are gob smacked when it doesn't defecate the winnings at their feet.  Being too important to fail the tax payer hands over their hard earned reward, and get a s*** load of imaginary manure in return.

Edited April 15, 2017 by Lord D'arcy Pew
Added Content