Buying a car isn’t what it seems these days. Fewer and fewer people actually own the car they drive. I’m definitely not implying that folks are stealing new cars. More that modern finance complicates the question of who, ultimately, owns that new car parked in the drive.
It’s a concern in the media as well. There have been horror headlines announcing another sub-prime lending crisis in the making with a financial bubble ripe for bursting.
‘Are cheap car loans the vehicle taking us to the next financial crash?’
‘Drivers face car loan crackdown to avoid new financial crisis’
Whilst there is definitely a shift in vehicle financing, the impact on the economy is not necessarily negative.
Personal Contract Plans (PCPs) now account for 82% of all new car registrations. A deposit and a monthly payment secure the vehicle for a set term (often three years) - and at the end of the contract the driver can decide whether to buy the car outright with a final payment or roll over their contract to a new car.
During the term of the contract, the seller still owns the car - and the driver is effectively leasing it. The final payment is the difference in a car’s value at the end of the deal rather than relating to the amount spent already. More than 80% of PCP customers roll over their contracts to a lease on a new car.
The question is whether this has the potential to create a dangerous bubble. The Bank of England has been on both sides of the debate. Bank economists have blogged that the car industry’s growing reliance on PCP has made it more vulnerable to macroeconomic downturns, as it is associated with increasing overall household debt, dependent on the used car market remaining buoyant and other external factors.
On the other hand, Alex Brazier, executive director of financial stability at the Bank of England, has spoken publiclyto confirm that the Bank of England is not overly concerned about the impacts of possible car finance market issues on the wider economy, even if (Brazier suggested) shareholders of car companies and banks involved might wish to “think very carefully about the risks” of providing PCP.
The Direct Gap experience is that subprime finance customers are barely ever offered PCP finance. We do see straight Hire Purchase loans, generally at large APRs. There is no balloon payment on these loans. In general, such loans are small in comparison to a prime customer using a PCP agreement. This would indicate that the subprime market at the moment isn’t in a position to upset the apple cart.
The other factor is used car prices. Availability of stock (or lack of it) keeps used car prices high with good reason - and this supports the PCP finance markets. As a frequent and regular car shopper, in my experience, good quality used car stock is always hard to get hold of.
In addition, there is widespread expectation is that the automotive industry is being over-optimitistic about new registrations. If new vehicle registrations fall this will only improve the prices of used cars because fewer will be available. This scenario further supports PCP providers as in predictions that prices remain high if not increasing.
Interestingly, our used car prices are still extremely low compared to mainland Europe. From a wider perspective the PCP model doesn’t cause alarm.
By Beate Kubitz at 6 Aug 2017, 00:00 AM