Britain’s motor economy has been fuelled over the last ten years by car loan products such as Personal Contract Purchases (PCP’s). These deals have proved extremely popular to consumers as it has allowed car buyers to access premium brands such as Audi, Mercedes and BMW due to lower monthly payments.
PCP’s have become the dominant form of car finance. They work by a customer putting down a deposit, usually 10% of the cost of the car, together with fixed monthly payments spread over three to five years. At the end of the term the consumer can either buy the car outright with a ‘balloon payment’ or simply hand the car back to the dealer.
Due to the big upfront payment and the prospect of a large balance to pay off as a balloon, monthly costs in between these two events are much lower than other forms of car finance.
There are down sides to a PCP, such as additional costs to pay such as excess mileage and any scraps or damage to the car. Plus owners do not own the car until the ‘balloon payment’ is made, despite having to pay the normal costs such as fuel and insurance.
However, PCP deals are coming under increasing scrutiny. Car dealer Lookers faces a raft of miss selling allegations of car finance after a whistle blower triggered a Financial Conduct Authority (FCA) investigation.
There over 5 million PCP contracts in existence. Any major disruption to these contracts by the FCA could cause the collapse of the motor industry.
Now MPs and debt charities are demanding wide ranging changes to the car finance market. They say they are concerned on the impact of the credit binge and the impact this could have on the economy.
Rachel Reeves, Labour MP and Chairman of the Business Energy and Industrial Strategy Committee has called for ‘far more transparency and greater scrutiny of the market’. She has warned that PCP debt poses a risk to households and the wider economy. It is of note that unlike other sectors, there are no reliable figures on the level of defaults and arrears on loans, so it is difficult to assess the true scale of the problem.
Conservative MP Steve Baker has also warned that there are direct parallels with housing in the run up to the global financial crisis of 2008.
In addition, research by debt charity StepChange found that 15% of its clients who have used car finance have felt that they had not had it adequately explained to them. 23% felt pressured into signing the deal. The Money Advice Trust said that issues identified in the motor industry by the City watchdog this year ‘were a reminder that firms need to do more’.
There are parallels to be seen with this subprime mortgage deals of 20 years ago that brought the world of finance to its knees. Similarly, PCP’s are an American import and Britons have flocked to use them in their millions. But this sharp rise in debt fuelled car purchasing should be a cause for worry. A steep rise in car loan arrears and repossessions has been noted and is also fuelling concern about another crash, both in the US and Britain.
For many people with poor credit records, a PCP deal is likely to be the only way they can borrow a sizeable sum of money. This is partly because of loans arranged against a tangible asset and partly a reflection of the regulatory environment that critics say allows people with fragile incomes to bypass security and take on debt in relation to car purchases. The Bank of England has become increasingly concerned about this last point. It has reported in the past that the economy faces a sharp rise in all forms of consumer credit and debt, and is a worry that will be monitored closely.
If you are struggling with debts whether through PCP car loans, credit cards or other loans, it is vital you speak with a debt specialist at the earliest opportunity. Farleys’ insolvency team can discuss options to help you manage your debts. Call the team today on 0845 287 0939 or submit your enquiry online.