Ten years ago, sub-prime mortgages were getting the blame for the economic collapse which followed. Could the low rates of car loans be the next vehicle which will fling us into an even more unstable economy? Some experts seem to think so.
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 the newest cars. It also claims that 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 destabilizing events coming down the pipelines. But experts aren’t as confident.
Experts are now warning that lending will be dramatically affected by even the slightest downturn in the economy, let alone widespread unemployment. Bank of England economists who wrote in a blog post titled, “Car finance – is the industry speeding?” argue that “the industry’s growing reliance on PCPs has made it more vulnerable to macroeconomic downturns”. There is also the concern that the banking industry, which provides most 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 much bigger than alleged.
PCPs have increased 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. This means that some of the most expensive Mercedes, Audi, Volvo and Land Rover models, which maintain their value and depreciate the least, have suddenly become affordable to those on a lower income. But experts warn that these loans are the ones that could exasperate an economic meltdown.
Cash purchases for cars are all but unknown anymore, and with disposable incomes shrinking thanks to the constantly increasing taxes and harsher regulations, any borrowing could stretch a family beyond its financial limits. But this is especially a problem when considering diesel powered vehicles.
“PCP car finance relies on the lenders’ ability to realize guaranteed future values, which can only happen in a strong used car market; but if hundreds of thousands of diesel drivers were to use consumer law to return their PCP-financed cars early – passing the early-termination losses back to the lenders – the cost would be so great that many finance companies wouldn’t be able to cope. It’s no exaggeration to speculate whether this could become the next financial crisis,” Simon Empson of Broadspeed.com said.
So the problem is now the UK government’s interference with diesel vehicles, and rather than let the market sort it out, their insistence on getting involved could facilitate a crash. An attempt by the new government to curb emissions could ensure the end of high-end diesel cars, millions of which have been sold through these PCP plans. Diesel vehicles values could plummet by 40%, forcing borrowers to return the cars and passing the loss onto the lender. This could spur another economic downturn as those lenders likely cannot cope with such a loss. Buckle-up. It could get bumpy.
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Author: Mac Slavo
Views: Read by 59 people
Date: June 11th, 2017
Website: www.SHTFplan.com
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