The British car industry fuels our country’s growth and with more cars being produced today than ever before, it’s been key to the economy’s revival. But as the popularity of financing arrangements rises, there’s concern at the increasing volume of debt looming over UK consumers.
In 2016, 90% of private car purchases were financed through Personal Contract Plans (PCPs), offering buyers the chance to pay a deposit followed by monthly instalments towards a part payment on the vehicle. At the end of the contract the buyer is given the option to pay the remaining balance or return the car if it’s deemed to be in good condition.
Car companies are marketing PCPs heavily, driven by record-low interest rates – and they’ve become increasingly popular as a more manageable alternative to buying a car. However, the Bank of England (BoE) is concerned at the level of consumer borrowing arising from these deals.
In America, the birthplace of the PCP concept, there has been a surge in people defaulting on their loans and having their cars repossessed. The BoE and the Financial Conduct Authority (FCA) are concerned that the same may happen in the UK.
The FCA is drawing up an inquiry into the amount lent to consumers and the robustness of underlying credit checks to try and determine how likely banks are to get their money back.
There are fears that these organisations, desperate to secure more sales, have been accepting applicants whom they know to have bad credit scores. Banks have already been warned to adopt stricter measures when considering candidates for credit cards.
Borrowing for car purchases increased 12% from 2015 to a record £31.6bn in 2016, and is predicted to top £40bn this year. Whilst lenders claim to be lending responsibly and providing a sustainable model, Alex Buttle, director of car buying at Motorway.co.uk warns that lenders “can’t control car values”.
He describes a situation where the rising numbers of PCPs being taken out against diesel cars don’t take into account the fall in value of these cars:
“We could be looking at a perfect storm, as the majority of car finance deals are PCPs, which are calculated according to how the car depreciates, at a time when car values could start falling at a rate of knots.”
The potential problem being that this depreciation will leave the buyer in negative equity at the end of the deal.
For many, a PCP is the only option available for them to be able to afford a new car. Equipped with the latest features and often including free breakdown cover, the customer may believe he or she can afford more than they really can.
Joana Elson, chief executive of the Money Advice Trust, emphasises the need for customers to think carefully about these deals before committing:
“For many consumers this offers access to a car that would otherwise be unaffordable, however it is important that the affordability of offers is fully assessed and that consumers are clear on the terms so that they know from the outset what they are committing to, and can plan accordingly.”
Car sales are vital to GDP growth. This means the BoE faces a difficult decision between the value of consumer spending to our economy’s continuing recovery and the possibility of record consumer debt underpinning the next financial crash.