Are car loans driving us towards the next financial crash?

elverson

Any views? A lot of people in the comments have said that it's worse to have a loan on a depreciating asset (a car) than an appreciating one (a house).

A huge increase in the amounts borrowed by already indebted households in Britain and the US to buy new vehicles is fuelling fears that “sub-prime cars” could ignite the next financial crash.

British households borrowed a record £31.6bn in 2016 to buy cars, up 12% on the year before, said the Finance and Leasing Association on Friday. Nine out of 10 private car buyers are now using personal contract plans (known as PCPs), which have boomed since interest rates fell to historic lows.

Under these cheap leasing deals, buyers pay a small deposit and then commit to making a monthly payment for the next three years with the option to buy or hand back the car at the end. The rise of PCPs helps to explain rocketing car sales in Britain despite flat or falling household incomes. A record 2.7m new cars were sold in Britain last year – the fifth year in a row of rising sales. Per head, the British are buying more new cars than any other large country in Europe.

https://www.theguardian.com/money/2017/feb/10/are-car-loans-driving-us-towards-the-next-financial-crash

Conrad

My dealings with clients informs me this picture painted in the OP is spot on. Very normalised for me to find people with £500 pm car finance.


But I will temper this by pointing out people these days just seem not to want to part with valuable cash / savings - I myself now fall into this category - I would rather use my savings to invest and not to waste on a depreciating asset.

westernpromise

I wonder if the diesel fiasco will crystallise this?

The price to own the car at the end of the credit term is set at its start. Anyone who HP'd a diseasel just before the emissions-fiddling scandal broke is invited to pay X amount to own it after 3 years at a price that takes no account of the likely lower value of the car in consequence of the scandal. They will be better advised to take the hand-it-back option.

Handed-back cars will end up auctioned off by the finance houses which will have to book huge write downs on an unknown number of vehicles.

michaels

Finances losses may happen independently of any credit issues.

I guess in general these deals are of a fixed fairly short duration (the average loan probably has 18 months to run) and thus the maximum loss of payments is say 18 x 300 (average monthly sum) - £5400 which sounds manageable.

Of course a huge number of deafults would probably also mean the sales market and thus value of the assets would collapse even for the vehicles where the credit agreement ends normally. Being an RHD drive country there is less scope to dispose of unwanted stock elsewhere as well.

antrobus

westernpromise wrote: »

..Handed-back cars will end up auctioned off by the finance houses which will have to book huge write downs on an unknown number of vehicles.

I think it's the manufacturers that would take the hit.

This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses....Moreover, manufacturers increasingly bear the risk of future falls in car prices, potentially making the industry even more vulnerable to macroeconomic shocks.

https://bankunderground.co.uk/2016/08/05/car-finance-is-the-industry-speeding/

Now, remind me, how many UK car manufacturers do we have? (85% of new cars are imports.) And how many UK car manufacturers are UK owned?

Besides, it seems that private car sales are actually falling, and that the growth in car sales is down to fleet buyers. So, if consumers are buying fewer cars, why are we worried?

http://www.bbc.co.uk/news/business-38516247

forgotmyname

Too many threads on here where people have bought cars and shown it off to family and friends and then realise they cannot afford it.

Only ever bought one brand new and losing £6k made me think why didnt i just buy something a few years older and let someone else take the hit.

Running costs including depreciation now only £50 a month instead of a few hundred in depreciation alone.

Too many using PCP or leases thinking its saving money because they have no depreciation to worry about. The link between the cars depreciation and the montly 'rental' does not compute.
Car loses 5k over 3 years, Happy person thinks haha the company have lost £5k and they have not. And all this for £225 a month Bargain?

Err nope you paid £8000 to rent a car for 3 years and have nothing to show for it.

Could be worse i guess a sub £3000 car and pay over £7000... Sister went to a give anyone finance type of place. The car sat unused for the last 7 months of the loan term because it needed repairs and she couldnt afford the loan and repairs. After confirming the loans settled she called the scrapman..

kabayiri

The upside of PCP is an increase in the quality and predictability of the 2nd hand stock 3/4 years down the line.

As a reseller, you know when the car is coming in; what miles it is likely to have done; and probably it's service history.

HornetSaver

kabayiri wrote: »

The upside of PCP is an increase in the quality and predictability of the 2nd hand stock 3/4 years down the line.

As a reseller, you know when the car is coming in; what miles it is likely to have done; and probably it's service history.

This is very true.

As with all fields, the naivety and poor decision-making of some creates opportunities and benefits for others. Just look at politics. Whichever political view you take, it's an undeniable fact that many who vote one way are as a matter of fact unwittingly voting for the benefit of others at their own expense. Or single issue groups/lobbies. Be it companies lobbying for lower headline rates of tax or unions lobbying for the best on-the-table deal for their own members, the results are often to their detriment in other ways - in these examples that could be stealth taxes and a tougher management culture respectively.

Ultimately though the best you can do is judge an issue on its own merits. Households taking on serviceable debt is in some elements good for the economy as a whole, because people end up spending money they wouldn't otherwise have spent, creating jobs that wouldn't otherwise be there. It doesn't change the fact that I'd advise anyone I knew to avoid non-emergency borrowing like the plague (housing and stoozing-related borrowing aside).

the_flying_pig

good news for the [imo] sensible people out there who prefer to buy their cars secondhand.



generally this 'boom' is far, far too small to pose the kind of existential threats that mortgage lending did/does.


it does all strike me as very silly though. my car is a banger even though my household income is quite good. of all the [sensible, i.e. excluding chronic gambling/drinking habits etc] things that people might really splurge on, e.g. their home, their kids' education, holidays, etc, cars strikes me as just about the least useful, most vanity-driven, silliest, etc.

steampowered

I've always found it very strange that people on modest incomes choose to pay £500 a month or more on their car finance.

I know a lot of people who do this. The cost really adds up. People seem to mentally be much more willing to buy an expensive car through finance than come up with a lump sum (even if they pay through the nose long term).

Each to their own I guess. People are adults and able to take responsibility for their own financial decisions.

[Deleted User]

I can never understand why anyone would want to pay £15k+ for a car (and they do).When a decent 2nd hand one can be had for 5k, the depreciation on new cars is eye watering